##### Definition:

Profitability index is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initial investment required for the project.

#### Formula:

Profitability Index = PV of Future Cash Flows / Initial Investment Requirement
**Where,**
PV - Present Value
##### Example:

Company Hiox India is undertaking a project at a cost of $40 million which is expected to generate future net cash flows with a present value of $55 million. Calculate the profitability index.

##### Given,

PV of Future Net Cash Flows = $55 million
Initial Investment Required = $40 million

##### Solution:

Profitability Index | = PV of Future Cash Flows / Initial Investment Requirement |

| = $ 55 / $40 |

| = $ 1.375 million |