What is profitability index?

The Profitability Index (PI) is the ratio between the present value of cash inflows and the present value of cash outflows. The profitability index ratio measures the monetary benefits (i.e. cash inflows) received for each dollar invested (i.e. cash outflow), with the cash flows discounted back to the present date.

How do you calculate profitability index (PI)?

Another variation of the PI formula adds the initial investment to the net present value (NPV), which is then divided by the initial investment. Profitability Index = (Net Present Value + Initial Investment) / Initial Investment In corporate finance, the primary use case for the PI ratio is for ranking projects and capital investments.

How does the profitability index affect financial attractiveness of a project?

As the value of the profitability index increases, so does the financial attractiveness of the proposed project. The PI is similar to the Return on Investment (ROI), except that the net profit is discounted . We assume an investment opportunity with the following characteristics:

What is the difference between profitability index and net present value?

The profitability index is a variation on the net present value concept. The only difference is that it results in a ratio, rather than a specific number of dollars of net present value. Present value of future cash flows ÷ Initial investment = Profitability Index