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.
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.
PV of Future Net Cash Flows = $55 million Initial Investment Required = $40 million
|Profitability Index||= PV of Future Cash Flows / Initial Investment Requirement|
|= $ 55 / $40|
|= $ 1.375 million|