The formula to calculate the Net Present Value Profitability Index is:
\[ \text{PI} = \left( \frac{\text{NPV}}{\text{I}} \right) + 1 \]
Where:
The net present value profitability index (PI) is a financial metric used to evaluate the profitability of an investment. It is calculated by dividing the net present value (NPV) of the cash flows generated by the investment by the initial investment cost, and then adding 1 to the result. A profitability index greater than 1 indicates that the investment is expected to generate more value than its cost, making it a potentially profitable investment. Conversely, a profitability index less than 1 suggests that the investment may not be worthwhile.
Let's consider an example:
Using the formula to calculate the Net Present Value Profitability Index:
\[ \text{PI} = \left( \frac{50,000}{40,000} \right) + 1 = 2.25 \]
This means that the net present value profitability index for this scenario is 2.25.
