### Business, Management

# The profitability index of the project in the system of economic efficiency indicators.

Both the planning and implementation of the investment project involve a number of difficulties. Obviously, all the problems that arise at the planning stage must first be solved. Any business is not only an idea, but also a large number of calculations. The person who plans an investment project has to determine both technical indicators and economic ones. Among the latter, a special place is occupied by those that form a system of indicators of economic efficiency.

Strictly speaking, you can include in this system any indicators that, in your opinion, most accurately characterize the effectiveness of the project in question. However, there are such indicators that are calculated always, without them it is impossible to imagine any business plan. This category includes net present value (denoted by NPV), internal profitability level (denoted by IRR), investment return period (denoted PP) and profitability index of the investment project (denoted IP or PI). Each of these indicators is important in its own way, but it is in the system that they allow the most holistic assessment of the project and make a conclusion about the appropriateness of investments.

Let us dwell in more detail on such an indicator as the profitability index. In principle, its calculation and economic sense are identical to any other indicator characterizing profitability. Each of these relative values shows the economic efficiency of resource use. For example, the return on assets shows the level of the profit that each unit of asset value brings.

In our case, the profitability index characterizes how many rubles of profit each ruble invested in investment brings. Based on this definition, we can conclude on how to calculate this figure. It is clear that it is necessary to attribute the amount of profit to the value of capital investments. But such a simple calculation will be extremely inaccurate, and it can be used only for the most approximate "by eye" evaluation. To do everything correctly and accurately, it is necessary to take into account the influence of the time factor. To do this, economics uses a discount mechanism that allows you to bring future value to the current time. Thus, we get that the numerator of the fraction is the amount of discounted profit for the entire duration of the project, and in the denominator - the sum of the investment.

Naturally, the profitability index has a certain value, which is a borderline, separating effective projects from inefficient ones. As you could already understand, this value is a unit. This level means that the investment is fully covered by profit. If you expect to receive from the project some effect other than economic, then it can be considered effective, otherwise - it is better to find a more profitable way of investing.

The level of profitability is directly related to the indicator of the net cost of the project, brought to the present moment (NPV). If you have already calculated the value of NPV, then profitability can be determined as follows: you need to divide NPV by the amount of discounted investments, and then add to the result one. Obviously, the negative value of NPV will lead to the fact that the profitability will be less than one, and consequently, the project is ineffective. Zero net cost of the project will be associated with profitability at the level of one, and therefore, if there are other positive effects, the project can already be adopted.

It should be remembered that the profitability index of the project can not alone describe the effectiveness of the proposed investments, so for an objective and accurate assessment it is desirable to calculate the entire system of indicators.

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