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### CHAPTER 24Calculation 18: Profitability Index

#### What It Means

Profitability index closely follows net present value (NPV) as a method of measuring investment return. With NPV, you take the present value (PV) of all future cash flows and subtract the amount of your initial investment. If the difference is zero or a positive number, then you have equaled or exceeded your required rate of return, indicated by the discount rate.

With profitability index, instead of finding the difference between PV and initial investment, you find the ratio. If the present worth of the cash flows equals your cash investment exactly, then the index will be 1.0.

On the surface, it would appear that this index is just another way of expressing the same result. In one ...

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