Profitability Index
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For an investment with an initial outlay followed by inflows, the profitability index is the present value of future net cash inflows divided by the initial outlay. It expresses discounted benefit per unit invested.
Example
Future net inflows have a present value of 12,000 and the initial outlay is 10,000. The index is 1.20 and the NPV is 2,000 under this convention.
Remember the difference
Definitions can vary when cash flows include later outlays, so state the formula. Ratio rankings alone can mislead for indivisible or mutually exclusive projects; consider total NPV and resource constraints.
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Published 4 November 2026. Prepared with AI assistance; examples are fictional and simplified for learning.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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