Profitability Index Calculator
From the present value of cash flows and the initial investment, compute the profitability index (PI) and the net present value (NPV).
Input Data
Results
At a glance:The profitability index ranks investments per dollar invested. PI = PV of cash flows ÷ initial investment; NPV = PV of cash flows − initial investment. PI > 1 means positive NPV; the higher the PI, the more value per dollar invested.
Formula
PI = PV of cash flows ÷ initial investment.
NPV = PV of cash flows − initial investment.
How to Use
- Enter the present value of the cash flows.
- Enter the initial investment.
- Read the profitability index and the NPV.
FAQ
How is the profitability index (PI) derived from NPV?
Between them: PI = (initial investment + NPV) ÷ initial investment = 1 + NPV ÷ initial investment. In other words, PI = PV of future cash flows ÷ initial investment. So it is simply the per-dollar value-creation of NPV, scaled to start at 1 instead of 0. When NPV > 0, PI > 1; NPV = 0, PI = 1; NPV < 0, PI < 1. Understanding this link lets you switch between the two freely and use both in decisions.
Why is PI better than NPV for choosing between projects of different sizes?
NPV is an absolute figure and favours big projects simply because they are big (a HK$10m project may have a larger NPV than a HK$1m one), so you cannot rank 'which is more efficient' by NPV alone. PI is the 'value per dollar invested' — a relative ratio — that strips out scale and measures efficiency, so it is the right tool for ranking different-sized projects by return per dollar. Note: with an unlimited budget PI and NPV agree on the best projects; the conflict appears under a capital budget cap, where you maximise total NPV by ranking on PI and picking within the cap. So: use NPV for absolute value added, PI for relative efficiency and capital-rationing ranking.
What is the decision rule and what are the exceptions?
The rule is clear: PI > 1 accept (NPV > 0, value created), PI = 1 indifferent (NPV = 0, break-even), PI < 1 reject (NPV < 0, value destroyed). But exceptions exist. First, very small investment near zero pushes PI to huge numbers and the ratio loses meaning — this happens when comparing 'uneven-scale' projects, so fall back to NPV. Second, the ranking from PI applies to independent projects; for mutually exclusive projects with different scales, the one with the higher PI may not give the larger total NPV — then prioritise NPV. Third, PI assumes cash flows are reinvested at the discount rate, which may not hold in reality. Fourth, it ignores project duration and risk, so combine with payback and risk assessment. In short: PI > 1 accept, but when scales differ or choices are mutually exclusive, NPV takes precedence.
Is a higher PI always better?
Mostly yes — a higher PI means more value created per dollar invested, so when choosing where to put limited capital it usually wins. But 'higher is always better' has caveats. First, scale: a project with PI 1.5 but tiny investment adds little total value, while a PI 1.2 but huge project may add far more in absolute terms — so look at both ratio and total. Second, reinvestment assumption: PI implicitly assumes interim cash flows are reinvested at the discount rate; if you cannot actually reinvest at that rate, the real PI is overstated. Third, risk and duration: PI does not show how long or how risky the cash flows are. Fourth, mutually exclusive projects: the higher-PI one is not necessarily the higher-NPV one. So treat PI as a key efficiency signal, but pair it with NPV for absolute value, plus payback and risk — let multiple metrics together drive the decision.
How does PI relate to NPV, IRR and the discount rate?
PI is one member of the same family as NPV and IRR, all built on discounting future cash flows, just framed differently. NPV is the absolute value added (PV of cash flows − investment); IRR is the discount rate that makes NPV zero (the percentage return); PI = PV of cash flows ÷ investment (value per dollar). Their links: PI > 1 ⇔ NPV > 0 ⇔ IRR > discount rate — all three give the same accept/reject answer. The discount rate is the common pivot: a higher discount rate lowers the PV of cash flows, lowers NPV and PI, and may flip IRR-from-above to below — so the rate you use matters for all three. Practical use: screen with NPV/PI (accept if positive/above 1); check the percentage return with IRR; compare efficiency across sizes with PI; and always vary the discount rate for sensitivity. PI is the most useful when you must rank projects under a capital ceiling, because it shows 'value per dollar' directly.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.