Profitability Index

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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:

profitability index formula

Accepted Criteria when BCR                                           Rule is

> 1                                                                          Accepted

= 1                                                                          Indifference

< 1                                                                            Rejected

Example 1:

Find the Profitability Index if cost of capital is 12 %?

profitability index example

(Acceptance Criterion: The higher the BCR the better the project)


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

1 Comment

  1. This is good page for understanding capital budgeting techniques.


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