📊 Profitability Index Calculator
Calculate investment efficiency ratio
Sum of all discounted cash flows
How to Use This Calculator
Enter Initial Investment
Input the total initial investment required for the project or investment opportunity.
Enter Present Value of Cash Flows
Input the present value of all future cash flows. This is the sum of all discounted cash flows using your required rate of return.
Calculate
Click calculate to see the Profitability Index (PI), which shows the return per dollar invested.
Review Results
Use the PI to evaluate investment efficiency, compare projects, and make capital budgeting decisions. PI > 1 means profitable.
Formula
Profitability Index (PI):
PI = Present Value of Future Cash Flows / Initial Investment
Net Present Value (NPV):
NPV = Present Value of Cash Flows - Initial Investment
Note: PI > 1 means profitable, PI = 1 means break-even, PI < 1 means not profitable
Example 1: Profitable Investment
Initial Investment: $100,000, PV of Cash Flows: $120,000
PI: $120,000 / $100,000 = 1.20
NPV: $120,000 - $100,000 = $20,000
✅ Profitable - for every $1 invested, you get $1.20 back
Example 2: Break-Even Investment
Initial Investment: $100,000, PV of Cash Flows: $100,000
PI: $100,000 / $100,000 = 1.00
NPV: $100,000 - $100,000 = $0
⚠️ Break-even - exactly recovers investment
About Profitability Index Calculator
The Profitability Index (PI) Calculator helps investors and businesses evaluate investment efficiency by calculating the ratio of present value of future cash flows to initial investment. Also known as the benefit-cost ratio, PI shows how much value you get per dollar invested, making it useful for ranking projects, comparing investments of different sizes, and making capital budgeting decisions when capital is limited.
When to Use This Calculator
- Investment Ranking: Rank projects by efficiency when capital is limited
- Project Comparison: Compare investments of different sizes on an efficiency basis
- Capital Budgeting: Make capital allocation decisions when you can't fund all projects
- Investment Analysis: Evaluate investment efficiency and returns
- Resource Allocation: Allocate limited capital to highest PI projects
- Efficiency Measurement: Measure return per dollar invested
Why Use Our Calculator?
- ✅ Quick Calculation: Instantly calculate PI from investment and cash flows
- ✅ Efficiency Metric: Shows return per dollar invested (efficiency measure)
- ✅ NPV Included: Also shows NPV for absolute value analysis
- ✅ Clear Results: Easy-to-understand PI and interpretation
- ✅ Free Tool: No cost for essential investment analysis
Common Applications
- Capital Budgeting: Rank and select projects when capital is constrained
- Investment Analysis: Evaluate investment efficiency and returns
- Project Selection: Choose among multiple investment opportunities
- Portfolio Optimization: Build optimal project portfolios
Tips for Best Results
- Accurate Cash Flows: Use realistic, discounted cash flow projections
- Consistent Discount Rate: Use the same discount rate for all projects you're comparing
- Complete Analysis: Include all cash flows (positive and negative) in present value
- Compare Projects: Use PI to rank projects when capital is limited
- Consider Both Metrics: Use PI for efficiency, NPV for absolute value
Frequently Asked Questions
What is Profitability Index?
Profitability Index (PI) is the ratio of present value of future cash flows to initial investment. It shows how much value you get per dollar invested. PI > 1 means profitable, PI = 1 means break-even, PI < 1 means not profitable. Also called benefit-cost ratio.
What's a good Profitability Index?
PI > 1.2 is excellent, PI 1.1-1.2 is good, PI 1.0-1.1 is acceptable, PI < 1.0 should be rejected. Higher PI means better efficiency (more return per dollar). However, also consider NPV for absolute value - a project with PI 1.5 and NPV $5,000 may be less valuable than PI 1.2 with NPV $50,000.
How is PI different from NPV?
NPV shows absolute value created (dollars), while PI shows relative efficiency (return per dollar). PI is better for comparing projects of different sizes, while NPV shows total value. Both give same accept/reject decision, but PI ranks by efficiency, NPV ranks by absolute value.
When should I use PI vs NPV?
Use PI when: capital is limited and you need to rank projects, comparing projects of different sizes, focusing on efficiency. Use NPV when: capital is unlimited, focusing on absolute value, maximizing total value. Often use both - PI for ranking, NPV for value.
How do I calculate present value of cash flows?
Discount each future cash flow to present value: PV = Cash Flow / (1 + r)^n, where r is discount rate and n is number of periods. Sum all discounted cash flows. Alternatively, use a financial calculator or NPV function. The calculator here assumes you've already calculated the total present value.
Can PI be used with mutually exclusive projects?
Yes, but be careful. For mutually exclusive projects (choose one), use NPV for the decision (maximize value). PI may favor smaller projects with higher efficiency. For independent projects (can choose multiple), rank by PI and select highest PI projects until capital is exhausted.