Evaluating Investment Opportunities with Profit Investment Ratio (2024)

When it comes to evaluating and shortlisting capital investment opportunities, an organization needs to consider selecting and investing in them as capital projects. With this, they must decide if the profit investment ratio (PIR) or value investment ratio (VIR), which is a capital budgeting measure that gauges the potential profitability of a capital project investment, is in an acceptable range. The evaluation and shortlisting of initiatives that could possibly be considered for selection and execution also takes into account the risk or threats exposure associated with each opportunity.

The profit investment ratio (PIR) is calculated by dividing the net present value of future benefits by the initial investment cost of the project opportunity. The initial investment cost includes the costs of site acquisition, professional services, construction, marketing, legal and other cost types needed to build the project. The net present value of future benefits includes all sources of revenue that the project will generate which is adjusted by the costs of refurbishment and renewal, operation, maintenance and end of life or assets disposition.

The profit investment ratio (PIR) equals the Present Value of Future Benefits divided by the Initial Investment needed to build the project. A profit investment ratio (PIR) of 1 indicates breaking even, which is an indifferent result for the investor. If the result is less than 1.0, then this investment should be avoided. Whereas, if the result is greater than 1.0, then this investment should be considered and be further analyzed to support the decision on whether the investment should be selected as a project or not.

As for the opportunity risk or threats exposure, it is based on the weighted risk exposure assessment for all risks or threats identified for the opportunity. The risk exposure is based on a score of 25. The score is a multiplication of a risk that is likely to occur which will be 5 points and a has catastrophic impact if it occurs which is also be 5 points. A risk exposure below 9 points is considered low, between 9 and 17 is moderate and above 17 as high. Of course, the common sense would be the highest risk exposure provides the highest profit investment ratio.

Evaluating Investment Opportunities with Profit Investment Ratio (1)

Using a Project Management Information System (PMIS) solution that address the pre-project stage of capital investments like PMWeb enables capturing the estimated initial investment costs as well as the anticipated benefits or revenues of the operation stage and costs during this stage. PMWeb initiative module allows capturing this estimate information and the investment life cycle schedule which is associated with the cost and revenue estimates needed to calculate the net present value of future benefits. The module also allows setting the scoring criteria for which initiatives with a PIR is greater than are analyzed against.

Evaluating Investment Opportunities with Profit Investment Ratio (2)

For the risk exposure analysis, it is recommended to use PMWeb custom form builder to create a simplified risk checklist template which has all risk categories and items pre-defined along with the weight for each. Of course, there is also the option to use PMWeb Risk Analysis module if needed.

Evaluating Investment Opportunities with Profit Investment Ratio (3)

The attachment tab for the initiative and risk register checklist templates allows attaching all those supportive documents. It is also highly recommended to add comments to each attached document to provide better understanding of what was the document for. The attachment tab also allows the user to link other records for business processes implemented in PMWeb, emails imported to PMWeb from designated email servers as well as associate URL hyperlinks with websites or documents that are not stored in PMWeb document management repository.

Evaluating Investment Opportunities with Profit Investment Ratio (4)

All those supportive documents need to also be uploaded into PMWeb document management repository so they can be stored and used. Those documents could be uploaded into folders or subfolders, so they are better organized and secured. PMWeb allows setting access rights to each folder to identify the users who have access rights to view documents stored in a folder. In addition, PMWeb allows setting notifications for individuals to receive emails when new documents are uploaded, or existing documents are downloaded or deleted.

Evaluating Investment Opportunities with Profit Investment Ratio (5)

To enforce accountability for all business processes required for the initiatives and risk assessment business processes, PMWeb workflow module helps create a workflow to formalize the review and approval tasks of those business processes. The workflow maps the sequence of the review and approval tasks along with the role or user assigned to the task, duration allotted for the tasks, rules for returning or resubmitting a document and available for each task.In addition, the workflow could be designed to include conditions to enforce the authority approval levels as defined in the Delegation of Authority (DoA) matrix. It should be noted that those involved in the workflows can include other members of the organization that are not part of the project management team.

Evaluating Investment Opportunities with Profit Investment Ratio (6)

When any of those business processes is initiated, the workflow tab available on the template captures the planned review and approve workflow tasks for each transaction as well as the actual history of those review and approval tasks. PMWeb captures the actual action data and time, done by who, action taken, comments made and whether team input was requested.

Evaluating Investment Opportunities with Profit Investment Ratio (7)

The Profit Investment Ratio (PIR) and Risk Exposure report includes filters to enable stakeholders to select only those initiatives that have a PIR value that is more than 1.00 as well as a risk or threats exposure below 19 or those with low or moderate exposure. The selected filter automatically adjusts all visuals and reports included in the report to only display the information relevant to the selected initiatives.

Evaluating Investment Opportunities with Profit Investment Ratio (8)
Evaluating Investment Opportunities with Profit Investment Ratio (2024)

FAQs

How do you calculate profit investment ratio? ›

The profit investment ratio (PIR) is calculated by dividing the net present value of future benefits by the initial investment cost of the project opportunity.

What is the profit ratio of an investment? ›

Return on investment (ROI) is calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have an ROI of 1, or 100% when expressed as a percentage.

What is the PIR profit to investment ratio? ›

Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment.

What is the formula for the profit ratio? ›

Profit Ratio = (Net Profit / Total Revenue) x 100%

Net profit is the amount of money left over after all the expenses, including operating expenses, taxes, interest, and depreciation, have been deducted from the total revenue. Total revenue is the total amount of money earned from sales or services provided.

What is the formula for investment ratio? ›

Return on investment, or ROI, is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment during the year in question. The basic formula for ROI is: ROI = Net Profit / Total Investment * 100.

What is the formula for investment profit? ›

You may calculate the return on investment using the formula: ROI = Net Profit / Cost of the investment * 100 If you are an investor, the ROI shows you the profitability of your investments. If you invest your money in mutual funds, the return on investment shows you the gain from your mutual fund schemes.

What is a good profit ratio? ›

An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.

How to calculate investment ratios? ›

ROI = Investment Gain / Investment Base

The first version of the ROI formula (net income divided by the cost of an investment) is the most commonly used ratio. The simplest way to think about the ROI formula is taking some type of “benefit” and dividing it by the “cost”.

What is a good investment ratio? ›

Generally, investors prefer the debt-to-equity (D/E) ratio to be less than 1. A ratio of 2 or higher might be interpreted as carrying more risk. But it also depends on the industry.

What is the most important ratio for investors? ›

Return on equity ratio

This is one of the most important financial ratios for calculating profit, looking at a company's net earnings minus dividends and dividing this figure by shareholders equity. The result tells you about a company's overall profitability, and can also be referred to as return on net worth.

What should my investment ratio be? ›

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

How do you calculate investment income ratio? ›

The investment income ratio (investment income divided by net premiums earned) takes investment income into account and is used in the calculation of the overall operating ratio.

How do you calculate profit percentage ratio? ›

Profit Percentage Formula

This profit is based on the cost price, hence, the formula to find the profit percentage is: (Profit/Cost Price) × 100.

References

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