Profitability Index Calculator

How it works

PI = PV of future cash flows ÷ initial investment · PV = Σ CFₜ ÷ (1 + r)ᵗ, with CFₜ = CF₁ × (1 + g)ᵗ⁻¹ (+ salvage in the last year) · NPV = PV − initial investment · PI > 1 ⇔ NPV > 0

The profitability index (also called the benefit-cost ratio or value investment ratio) tells you how much present value each unit of money invested creates. A PI above 1 means the project earns more than the required return and has a positive NPV; below 1 it destroys value. Because it is a ratio, it is most useful for ranking projects when capital is limited — choose the projects with the highest PI until the budget runs out — while NPV remains the tie-breaker for mutually exclusive projects of different size.

Worked example

An investment of 100,000 that returns 25,000 a year for 6 years at a 10% discount rate: the present value of the cash flows is 25,000 × [1 − 1.10⁻⁶] ÷ 0.10 = 108,881.52, so PI = 108,881.52 ÷ 100,000 = 1.09 and NPV = 8,881.52. Because the PI is above 1 the project is accepted — each 1 invested returns 1.09 in today’s money — while the undiscounted inflows total 150,000.

Sources: Corporate Finance Institute — Profitability index · Wikipedia — Profitability index

Frequently asked questions