What this calculator does
The profitability index expresses net present value as a ratio rather than a dollar amount. A value above 1 means the discounted cash flows exceed the investment, which is exactly the same test as a positive net present value.
The ratio form earns its keep when capital is rationed. Two projects may both add value, but the one returning $1.32 of present value per dollar invested uses scarce capital better than one returning $1.13.
The formula
Each future cash flow is discounted to present value and the results are summed. Dividing that total by the initial investment gives the index.
| Term | Meaning |
|---|---|
| Profitability index | Present value of future flows divided by the investment. Above 1 creates value. |
| Capital rationing | When available capital is limited, which is where ranking by ratio beats ranking by dollar amount. |
| Present value | Future cash flows discounted back at the required rate of return. |
The inputs explained
| Field | What to enter |
|---|---|
| Future cash flows (comma separated, one per year) | Future cash flows, one per year, comma separated. |
| Discount rate (%) | The discount rate, usually the cost of capital. |
| Initial investment ($) | The initial investment required. |
When to use it
Ranking projects under a capital constraint
Where not everything can be funded, the highest index per dollar is the right ordering.
Screening an investment
An index below 1 fails the same test as a negative net present value.
Comparing projects of different sizes
The ratio normalises for scale in a way net present value does not.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does the investment size change the index?
The same cash flows against three levels of investment.
| Initial investment | Profitability index | Verdict |
|---|---|---|
| $600k | 1.321 | Value-adding (PI > 1) |
| $700k | 1.132 | Value-adding (PI > 1) |
| $900k | 0.881 | Value-destroying (PI < 1) |
Questions
How does this relate to net present value?
Directly. An index above 1 is exactly equivalent to a positive net present value, and an index of 1 is a net present value of zero. The index is the same information expressed as a ratio rather than a dollar amount.
When is the index better than NPV?
Under capital rationing. When funds are limited, ranking by value per dollar invested allocates capital better than ranking by total value, because it accounts for what each project consumes.
What is the index's weakness?
It ignores scale. A small project with an index of 2.0 creating $100,000 of value ranks above a large one at 1.3 creating $3,000,000. Where capital is not constrained, the dollar figure matters more.
Should the initial investment be in the numerator?
No. The convention is present value of future cash flows divided by the initial outlay, which puts the break-even at exactly 1. Some texts subtract the investment first, which shifts the break-even to zero.
For the dollar version of the same calculation, see the NPV and IRR calculator. For a rate-based measure, see the MIRR calculator.