Profitability index

Profitability index is the ratio of the present value of a project's future cash flows to its initial investment. A value above 1 signals positive NPV; it ranks projects under capital rationing.

ByHoang TruongUpdated June 30, 2026

FrameworkDCF investment appraisal

See it move

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Two projects each require €40,000. Project A generates cash flows with a present value of €46,000, a profitability index of 1.15 and an NPV of €6,000. Project B generates a present value of €48,000, a profitability index of 1.20 and an NPV of €8,000. With only €40,000 of capital available, Project B's higher PI makes it the better use of that scarce capital.

Where it fits

TopicCapital Budgeting & Investment AppraisalAdvancedSubjectCorporate FinanceAdvanced

The formula

LaTeX

PI = \frac{\displaystyle\sum_{t=1}^{n} \frac{CF_t}{(1+r)^t}}{C_0}

Variables

$P I$: Profitability index (ratio)
$P V o f f u t u r ec a s h f l o w s$: Sum of all discounted future inflows (€)
$C_{0}$: Initial investment (€)

PI > 1 equals positive NPV; use to rank projects under capital rationing.