Profitability Index Calculator
Evaluate investment projects using the Profitability Index (PI) method
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How do you calculate the profitability index?
The profitability index is calculated using the formula: PI = Present Value of Future Cash Flows ÷ Initial Investment. For example, if a project has a present value of cash flows worth $120,000 and requires an initial investment of $100,000, the PI would be 1.2, indicating the project generates $1.20 for every $1 invested.
What is the profitability index calculator?
A profitability index calculator is a financial tool that automatically computes the PI ratio by inputting your initial investment amount, expected cash flows, discount rate, and time period. It helps investors and businesses quickly evaluate whether an investment will generate positive returns and compare multiple investment opportunities efficiently.
Which is better NPV or PI?
Both NPV and PI are valuable but serve different purposes. NPV shows the absolute dollar value created, while PI shows the efficiency of investment per dollar spent. For single projects, NPV is often preferred. For comparing projects of different sizes or when capital is limited, PI is better as it shows relative profitability per dollar invested.
What is a good profitability index?
A good profitability index is greater than 1.0, indicating the investment generates more value than it costs. PI > 1.0 means positive NPV, PI = 1.0 means break-even, and PI < 1.0 means negative returns. Generally, PI of 1.1-1.3 is considered good, while PI above 1.5 is excellent, though this varies by industry and risk level.
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