One of the efficiency metrics of Financial Investment defined as:
\mbox{PVI} = \frac{\mbox{PV}[CF^+]}{\mbox{PV}[CF^-]} |
where
Cash Inflows | Present Value of future Cash Inflows | ||
Cash Outflows | Present Value of future Cash Outflows |
In case of:
then equation turns into conventional Profitability Index equation:
\mbox{PVI} = \frac{\mbox{PV}[CF^+]}{\mbox{PV}[CF^-]} = \frac{\mbox{PV}[CF^+]}{I_0} = 1 + \frac{NPV}{I_0} |
The key difference with NPV is that PVI shows a value of returns per unit cash invested.
This particularly means that some Projects with higher NPV may be less attractive in PVI terms than Projects with lesser NPV as they require a higher Initial Investment.
This allows a fair comparison of investment efficiency between two investment projects with different Initial Investment volumes.
The corporate investment policy usually dictates that:
The quantification of Project's is performed individually for each Project based on its nature.
Weighing the Project's risks against PVI to include to or exclude from Investment Package is based on the Corporate Investment Policy.
Economics / Investment / Financial Investment
[ Net Present Value (NPV) ][ Profitability Index (PI) ]