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Profitability Index is also called Benefit Cost Ratio (BCR), is the sum of all present values of cash inflows that are expected to occur over the life of project divided by present values of all cash outflows. So we can say that Benefit Cost Ratio is ratio between Cash Inflow and Cash Outflow:
Accepted Criteria when BCR Rule is
> 1 Accepted
= 1 Indifference
< 1 Rejected
Example 1:
Find the Profitability Index if cost of capital is 12 %?
(Acceptance Criterion: The higher the BCR the better the project)
Related Topics
Capital Budgeting Problems
Further Readings
References
Financial Management: Theory and Practice, Dr Eugene F Brigham & C Micheal Ehrhardt
Fundamentals of Financial Management: Concise Edition, Brigham Houston
The Economist Guide to Financial Management, John Tennet
Financial Management: Core Concepts, Raymond M Brooks
This is good page for understanding capital budgeting techniques.