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The Profitability Index (PI), also called the benefit-cost ratio, divides the present value of a project's future cash flows by its initial investment. A PI above 1 means the project is expected to create value; below 1 means it destroys value. Unlike NPV's dollar figure, PI is a ratio, which makes it the right tool for ranking projects of different sizes.
How it works
Enter the initial investment and the present value of the project's future cash flows. PI = PV of cash flows ÷ initial investment.
- Enter initial investment.
- Enter present value of future cash flows.
- Click Calculate to see your results.
Examples
A straightforward project
A $100,000 investment expected to generate $120,000 in present-value cash flows has a PI of 1.2 — for every dollar invested, $1.20 of value is expected back.
Who should use it
- Ranking multiple independent projects under a capital constraint.
- Quick screening of whether a project clears the value-creation bar.
Industry applications
- Corporate finance and capital budgeting
- Private equity and project finance
Advantages
- Easy to compare across projects of different sizes.
- Directly tied to NPV, so no method conflict.
Limitations
- Can be misleading for mutually exclusive projects of different scale — a smaller project can have a higher PI but lower absolute NPV.
Common mistakes to avoid
- Using PI alone to choose between mutually exclusive projects of very different sizes without also checking absolute NPV.
Best practices
- Use PI to rank independent projects under a limited capital budget — pick the highest-PI projects first until the budget is used up.
Tips
- Use the Net Present Value Calculator to get the PV of cash flows figure this tool needs as an input.