Profitability Index Calculator

The Profitability Index (PI) or profit investment ratio (PIR) is a widely used measure for evaluating viability and profitability of an investment project. It is calculated by dividing the present value of future cash flows by the initial amount invested. If the profitability index is greater than or equal to 1, it is termed a good and acceptable investment.

The calculator given below helps in the calculation of the PI or PIR based on the amount of investment, discount rate, and the number of years. It also calculates the Net Present Value (NPV) of an investment.

Follow these 5 easy steps to determine PI:

1. Select your preferred currency from the dropdown list (optional)
2. Enter the amount of investment
3. Enter the discount rate and the years of cash flow
4. Enter the annual cash flow for each year
5. Click on "Calculate" to see the results.

Profitability Index Formula & Example

This calculator uses the following formula to calculate the profitability index:

Profitability Index (PI) = Present Value of Future Cash Flows / Initial Investment

OR

PI = [ CF₁ × (1 + r) ^-1 + CF₂ × (1 + r) ^-2 + . . . + CF_n × (1 + r) ^-n ] / CF₀

• Where,
• PI is the profitability index,
• CF is the cash flow for a period,
• r is the discount rate in decimal form,
• n is the number of periods (years),
• CF₀ is the initial investment.

Example: Assume a project costs $10,000. It will generate cash flows of $2000, $3000, $4000 for the next 3 years. Calculate the profitability index if the discount rate is 10%.

Solution: Profitability Index = [ CF₁ × (1 + r) ^-1 + CF₂ × (1 + r) ^-2 + . . . + CF_n × (1 + r) ^-n ] / CF₀

• CF₀ = 10000,
• CF₁ = 1000,
• CF₂ = 2000,
• CF₃ = 4000,
• n = 3,
• r = 10% , or 0.1 in decimal

In this example, the profitability index (PI) would be calculated as follows:

Profitability Index = [ 1000/(1.1)¹ + 2000/(1.1)² + 4000/(1.1)³ ] / 10000

= [ 909.09 + 1652.89 + 3005.26 ] / 10000

= [ 909.09 + 1652.89 + 3005.26 ] / 10000

= [ 5567.24 ] / 10000

The profitability index for this project is 0.5567

The project should be rejected since its PI is less than 1