Final answer:
The profitability index assesses the desirability of an investment by comparing the present value of cash inflows to the initial outlay. Factors influencing profitability include interest rates, energy prices, government incentives, and future profit expectations. A profitability index above 1 suggests an investment is worthy.
Step-by-step explanation:
The profitability index is a measure used in capital budgeting to determine the desirability of a proposed capital investment. It calculates the relationship between the present value of cash inflows and the initial investment: if the profitability index is greater than 1, the investment generates value and is thereby acceptable.
Consider interest rates, which significantly impact investment decisions. Lower interest rates reduce the cost of capital, enhancing the investment's profitability. On the other hand, if energy prices decline, investments reliant on energy inputs become more profitable.