Profitability Index

Learning Outcomes

  • Calculate the profitability index

The profitability index (PI) is a measure of a project’s or investment’s attractiveness. Compared to most calculations, the profitability index is a simple calculation:

The present value of future expected cash flows

Divided by

The initial investment amount in the project.

For the JuxtaPos project, the present value of future expected cash flows at 15% was:

Year Factor Amount Total
Year 1 $    60,000 times the factor of    0.8700 = $52,200
Year 2   60,000     0.7560 $ 45,360
Year 3         55,000     0.6580 $ 36,190
Year 4           55,000     0.5720 $ 31,460
Year 5           50,000     0.4970 $ 24,850
Year 6           65,000     0.4320 $ 28,080
Total present value of cash inflows Single Line$218,140


The initial investment was $230,000, so the PI is 218,140 / 230,000 = 0.95

As a general rule of thumb, a PI greater than 1.0 is deemed as a good investment, with higher values corresponding to more attractive projects. As we assess our capital needs and constraints as we compare various options, some of which are mutually exclusive, we would normally choose those with the highest PIs (absent other qualitative factors which have probably already been taken into account in the screening process).

Now check your understanding of the profitability index.

Practice Question