![]() Reject if PI 30.3), and should thus be preferred over Project II. ![]() With a PI below 1.0, on the other hand, a project is likely to destroy shareholder value, hence its NPV would be negative. A ratio above 1.0 would mean that a venture returns a profit above its required investment, and thus has a positive NPV. That said, a result of exactly 1.0 would be equivalent to a break-even, where NPV = 0. ![]() The Profitability Index represents a ratio between the discounted profit and the initial investment. How Do We Interpret the Profitability Index? To build solid decision-making criteria for investments, we often combine it with other ratios. Discounted cash flows may unexpectedly differ in the future, which immediately makes us question the predictive accuracy of both PI and NPV figures as stand-alone metrics. Note that PI results are based on estimates rather than precise numbers taken from a firm’s major financial statements. Where “ PV of future cash flows” is the present value of cash flows, starting from period 1 until the end of the project, and NPV denotes the Net Present Value.
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