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Profitability Index Formula
Profitability Index = (PV of future cash flows) / Initial investment
= (NPV + Initial investment) / Initial Investment
Profitability Index Example
Arch company invested $30,000 for a project and expects the NPV of that project to be $9,000.
Profitability Index = (30,000 + 9,000) / 30,000 = 2.3
This means a company should perform the investment project because profitability index is greater than 1.