Profitability Index Calculator

Formula

To calculate the profitability index (PI):

\[ \text{PI} = \frac{\text{NPV}}{\text{I}} \]

Where:

$\text{PI}$ is the profitability index
$\text{NPV}$ is the present value of future cash flows
$\text{I}$ is the initial investment

What is a Profitability Index?

The Profitability Index, also known as the Profit Investment Ratio (PIR) or Benefit-Cost Ratio (BCR), is a financial metric used to evaluate the potential profitability of an investment or project. It serves as an indicator of the value created by an investment relative to its cost. When the index is greater than 1, it signifies that the project is expected to generate more value than the initial investment, making it potentially profitable. If the index is less than 1, the investment is projected to generate less value than the amount invested, indicating a potential loss.

Example Calculation 1

Let's assume the following values:

Net Present Value ($\text{NPV}$) = $200,000
Initial Investment ($\text{I}$) = $150,000

Using the formula:

\[ \text{PI} = \frac{200000}{150000} = 1.33 \]

The Profitability Index is 1.33.

Example Calculation 2

Let's assume the following values:

Net Present Value ($\text{NPV}$) = $500,000
Initial Investment ($\text{I}$) = $400,000

Using the formula:

\[ \text{PI} = \frac{500000}{400000} = 1.25 \]

The Profitability Index is 1.25.