Profitability Index

This video discusses the Profitability Index, a metric that is used to select which positive-NPV projects to accept when there is a resource constraint (e.g., a budget). The video provides a comprehensive example to show how the Profitability Index is calculated, demonstrates how to use the Profitability Index in evaluating the pool of projects, and highlights two assumptions that must be valid for the Profitability Index method to work.
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[@devancoleman5496]

this guy's got to be the best teacher I've seen on KZbin

[@Edspira]

thanks so much!

[@josephdecker5660]

agreed. tony bell is also a good one, but he's behind a paywall.

[@Sadistic996]

Mister, you are the most loved person in Corporate finance among students for years now. I will comment on this video in the name of all videos i have watched to say thank you for everything

[@5281Fsc]

I can say this guy got to be one of the best teacher i have ever seen through my education period. Everything is so clear.

[@Edspira]

Wow, thanks for the compliment. I never thought that the Hulk would be watching my business videos!

[@gamingvids6651]

To those in the comments worried about npv - the investment you want to choose is the one with the highest npv and above 0. You can do the same thing to calculate the profitability index - your answer would not change. But you are all correct in saying that npv+initial investment/initial investment = profitability index. He may have just gotten the term mixed up, as the calculation of PI only takes pv of cash inflows.

[@03orosa]

Crystal clear & simple explanation. Amazing videos! Thanks so much

[@nnbb12122]

Best teacher ever! Thank you so much.. much appreciated.

[@alvisiddique5043]

but as far as i know PI= (NPV + initial investment) / initial investment

[@damihu1299]

yeah i also have this question

[@bhagatsingh5019]

Thank you for your all beautifully explained videos.

[@brianputt984]

Looking at the incremental profitability index can also be helpful. Plot the data (NPV vs Discounted Capital) on an XY graphic. Pick a criteria or hurdle defined as 1+PI. We can easily then determine the incremental PI among the projects.

[@petrasophia-ritch9359]

Thank you! This is the best explanation for PI I have found!!

[@Edspira]

No problem!

[@JonatanContrerasjononthemoon]

Would this be similar then to what the total asset turnover ratio indicates?

[@temurimatua8426]

Dear Sir, shall I deduct from cash inflow the operational cost of the project? for instance every year I have cash inflow (revenue) 10'000 USD per year 5 year, in the year 1 I have operational cost of the project 5000 USD, so while calculating NPV I have to deduct inflow (revenue) with cost of capital i.e discount rate 10% plus 5000 USD?

[@user-ly7rg3ll4o]

Shouldn't the formula be all PV of cashflows starting yr 1 / by the initial investment? Meaning you don't count the initials investment in the nominator?

[@garethsetati]

Clear explanation. Thanks

[@togggn]

You are saving my life...

[@human8461]

Cool basic finance knowledge

[@Edspira]

Glad it was helpful!

[@sudhansukumar9218]

Good explaination.

[@riz2654]

Then we have to choose project A and D?

[@nouraal338]

Thank you very much 😍

[@Slipperyeel117]

Your videos are awesome, you make it so simple to follow.. Keep up the good work!!

[@devancoleman5496]

christopher coromandel

[@devancoleman5496]

christopher coromandel I agree Christopher this guy is better than my instructor

[@kingmoe1545]

Well explained

[@stefandietrich8762]

Thank you for your help!

[@Edspira]

No problem!

[@adventures1670]

This was dank

[@fish-my1ul]

thanks

[@nader5873]

PI= NPV/The initial cash outlay. its very simple

[@ahsanmajeed6578]

please tell me what does PI results illustrates...I mean if PI= 1.17 what does it means and what is the unit of 1.17??? Is it 1.17 times 1.17% $1.17 I expect quick response from you side :)

[@Edspira]

The profitability index has no units. It is basically a comparative measure of how profitable a project is. The higher the PI, the more profitable the project.

[@shahbazkhalilli8593]

I think it is not actually true because PI = (NPV+Investment)/Investment

[@LifeInNoMansLand]

I am a little confused here. What you are calling NPV for instance 875 for project A is actually the total of discounted inflows? Because as i have understood the terms Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. 875 for project A is the discounted inflows after you make the upfront investment of 750 which is the outflow?

[@Edspira]

You are correct that the NPV is the difference between the present value of cash inflows and the present value of cash outflows. It is basically used to calculate how profitable an investment or project could be. I actually have another video on the calculation of NPV: kzbin.info/www/bejne/fnepnHmDm9SnipI I hope this helps!

[@LifeInNoMansLand]

Thanks for you reply. I have seen the other video on NPV. I was just trying to understand the numbers in the example in this current video. Appreciate the videos.

[@brycemaximum4462]

shouldn't it be (npv+investment)/investment ?

[@Edspira]

No, it it NPV divided by the investment. Here's an additional source: www.investopedia.com/terms/p/profitability.asp Happy studying!

[@professorikram]

@@Edspira I think you mean PRESENT VALUE of Cash Flows / Initiatl Investment, not NET Present Value / Initial Investment. Even the above link says the same.

[@gamingvids6651]

It can be calculated as youve said. It can also be calculated by adding the pv of all cash inflows, divided by initial investment.

[@nathantaylormckenzie]

Oh man I love Profitability Indices....who's with me??

[@Edspira]

+Bob Shapiro Here here!

[@mohammedmahameed9082]

god, i love you!!

[@Edspira]

Thank you my friend!

[@FluffyTalks1]

what?? this is wrong... its not NPV / initial, its NPV + initial / initial ??????????? this is different than my textbook and prof

[@FluffyTalks1]

its the PV of future cash flows, not NPV

[@karabokwetepe964]

resourcefull

[@Edspira]

Thanks!

[@ronzaqusous9453]

Please change the colors.. Black back ground with shiny colors for writing is a disaster.