Profitability Index Calculator
Calculate the Profitability Index (PI) — the ratio of the present value of future cash flows to the initial investment. PI tells you how much value you create per dollar invested, making it useful for ranking projects of different sizes.
What Is Profitability Index?
The Profitability Index (PI) — also called the profit investment ratio or value investment ratio — measures how much present value a project creates for every dollar invested. It is calculated as the present value of future cash flows divided by the initial investment.
PI is especially useful when comparing projects of different sizes. A small project with PI of 2.0 may create more value per dollar invested than a large project with PI of 1.2, even if the large project has a higher absolute NPV. That is why PI is used as a capital rationing tool — to rank projects when you cannot fund all of them.
Profitability Index Formula
Profitability Index = Present Value of Future Cash Flows ÷ Initial Investment
PI = 1 + (NPV ÷ Initial Investment)
- PI > 1.0 — project creates value. Accept.
- PI = 1.0 — project breaks even. Indifferent.
- PI < 1.0 — project destroys value. Reject.
Worked Example
A project has a PV of future cash flows = $150,000 and an initial investment = $100,000:
PI = $150,000 ÷ $100,000 = 1.50
NPV = $150,000 − $100,000 = $50,000
Interpretation: for every $1 invested, the project returns $1.50 in present value — a $0.50 profit per dollar invested. Accept.
Compare with a larger project: PV = $1,000,000, investment = $900,000, PI = 1.11, NPV = $100,000. The larger project has higher absolute NPV but lower PI. If capital is limited, choose the smaller project (higher PI) because it creates more value per dollar.
PI vs NPV vs IRR
- NPV — dollar amount of value created. Best for absolute decision (accept or reject a single project).
- IRR — percentage annual return. Good for comparison but can mislead when project sizes differ.
- PI — value created per dollar invested. Best for ranking projects when capital is limited (capital rationing).
- All three agree on accept/reject for independent projects. They can disagree when ranking mutually exclusive projects of different sizes.
Frequently Asked Questions
What is a good profitability index?
Any PI above 1.0 means the project creates value. The higher, the better. A PI of 1.5 means $0.50 profit per dollar invested; a PI of 2.0 means $1.00 profit per dollar. For capital rationing decisions, rank projects by PI — fund the highest PI first.
What is the difference between PI and NPV?
NPV is an absolute dollar amount; PI is a ratio. NPV answers "how much value does this create?" PI answers "how much value per dollar invested?" A $1 million project with NPV of $100,000 and a $100,000 project with NPV of $50,000 both create value — but the smaller project has a higher PI (1.50 vs 1.10). When choosing between mutually exclusive projects, NPV is usually the right call; when rationing capital, PI is better.
Can the profitability index be negative?
No. PI is a ratio of PV to initial investment. Both are usually positive, and PI cannot go below 0 unless PV is negative (impossible in normal capital budgeting). A PI of 0 would mean the project generates no PV of inflows — a total loss. In practice, PI ranges from 0 (terrible) to 2–3 (excellent).
What is capital rationing?
Capital rationing is when a company has more profitable projects than it can afford to fund. In that case, it must rank projects and fund the best ones first. PI is the ideal ranking metric because it measures value created per dollar invested — the higher the PI, the better use of limited capital. Sort projects by PI descending, fund from the top until the budget is exhausted.
Does PI work for mutually exclusive projects?
PI can be misleading for mutually exclusive projects of different sizes. A small project with PI of 2.0 has higher value per dollar than a large project with PI of 1.2 — but if the large project generates $5M NPV and the small project $1M, the large project creates more absolute value. For mutually exclusive projects, always prioritise NPV over PI.
How does PI relate to NPV?
PI is directly derived from NPV: PI = 1 + (NPV ÷ Initial Investment). If NPV is zero, PI is 1.0. If NPV is positive, PI > 1.0. If NPV is negative, PI < 1.0. So PI and NPV will always agree on accept/reject for a single project — they differ only in whether the answer is in dollars or in multiples.