What Is the Present Value Index?
The profit index (PI) refers to the ratio of the total present value of each year's cash inflows converted to the total present value of the original investment, which is converted at the base rate of return or the set discount rate after commissioning.
- Profit Index (Pl) = Total present value of cash inflows in each year after commissioning
- Or: = 1 + net present value rate
- Only investment projects with a profit index greater than or equal to 1 are financially feasible.
- The advantage is that it can reflect the relationship between the capital investment of the project investment and the total output from a dynamic perspective;
- Disadvantages cannot directly reflect the actual rate of return on investment projects.