What is the Profitability Index (PI)?

Also called the benefit-cost ratio, PI = Present Value of Future Cash Flows / Initial Investment. A PI greater than 1.0 means the project is expected to create value.

How does PI differ from NPV?

NPV gives the absolute dollar value added. PI gives a relative measure of value per dollar invested, which is useful when comparing projects of different sizes or when capital is limited.

When should I use the Profitability Index?

Use it for capital rationing situations (limited budget) to rank projects by bang-for-the-buck. Combine it with NPV for the best decisions — never rely on PI alone for mutually exclusive projects of very different scales.

Profitability Index Calculator

Profitability Index - Calculate and analyze your financial metrics with this comprehensive calculator.

Profitability Index (PI) Calculator

Evaluate investment efficiency with PI, NPV, IRR, and comprehensive project ranking analysis

Project Details

Project Name

Initial Investment ($)

Years

Discount %

Cash Flow Mode

Annual Cash Flows ($)

Comma-separated values

Examples

PI Formula

PI = PV of Cash Flows / Initial Investment

Decision Rule

Accept if PI ≥ 1.0

Profitability Index (PI)

PI measures the ratio of present value of inflows to the initial investment. PI > 1 indicates value creation at the chosen discount rate.

Formula

PI = (\u2211 CF_t / (1 + r)^t) / Initial investment

Example

Initial outlay $100,000; inflows: $40,000, $45,000, $50,000; r = 10%.

PV inflows = 36,364 + 37,190 + 37,565 = $111,119
PI = 111,119 / 100,000 = 1.11

Since PI > 1, the project is acceptable at 10%.

Step-by-Step

List initial investment and future inflows by period.
Choose discount rate r.
Compute PV of inflows and divide by initial investment.
Interpret: PI > 1 accept; PI < 1 reject.

Considerations

Useful for ranking projects when capital is rationed.
NPV provides absolute value; PI provides relative efficiency.
Assumptions (timing, r, cash flow certainty) affect results.

Related Metrics

Net Present Value (NPV) — absolute value created, best for mutually exclusive choices.
Internal Rate of Return (IRR) — percentage return accounting for timing.
Return on Investment (ROI) — simple profitability ratio.

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