A profitability index above 1 means the project earns more than its cost of capital (positive NPV). When capital is limited, ranking projects by PI helps choose the combination that creates the most value.
How to use the Profitability Index Calculator
- Initial investment
- Future cash flows
- Present value of future cash flows
- Discount rate
- Cash flow in each year
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the initial investment and either the present value of future cash flows, or the discount rate and yearly cash flows.
Inputs explained
| Field | What to enter |
|---|---|
| Initial investment | Amount in your currency |
| Future cash flows | Choose one: I know their present value, Calculate from yearly cash flows |
| Present value of future cash flows | Amount in your currency |
| Discount rate | In % |
| Cash flow in each year | A list of numbers separated by commas, spaces or new lines |
What each result means
- Profitability index = [Present value of cash flows]÷[Initial investment]
- Net present value = [Present value of cash flows] – [Initial investment]
Example values
How the main result changes when Initial investment changes and everything else stays at the example values above:
| Initial investment | Profitability index |
|---|---|
| 50,000 | 2.383 |
| 75,000 | 1.589 |
| 100,000 | 1.192 |
| 125,000 | 0.953 |
| 150,000 | 0.794 |
| 200,000 | 0.596 |
Formula
PI = PV of future cash flows ÷ initial investment
PV = Σ CFₜ ÷ (1 + r)^t
NPV = PV − initial investment
Worked example
Inputs: Initial investment: $100,000; Future cash flows: Calculate from yearly cash flows; Discount rate: 10 %; Cash flow in each year: 30000, 35000, 40000, 30000, 20000.
Results: Present value of cash flows = $119,159.77; Profitability index = 1.192; Net present value = $19,159.77; Decision = Accept – creates value.
Frequently asked questions
What is a good profitability index?
Anything above 1; the higher, the more value per dollar invested.
How is PI related to NPV?
PI > 1 exactly when NPV > 0.
When is PI better than NPV?
When capital is rationed and you must rank projects of different sizes.