About the Profitability Index Calculator
This profitability index calculator measures how much present value a project generates for every dollar invested. Enter the up-front investment, the cash flow you expect in each future year and your discount rate; the calculator discounts the future cash flows to today and divides by the initial investment. A profitability index (PI) above 1.0 means the project earns more than your required return, below 1.0 means it destroys value, and exactly 1.0 means it just breaks even.
Because PI is a ratio, it is the go-to capital budgeting tool under capital rationing — when you have a fixed budget and more good projects than money, ranking projects by PI tends to squeeze the most net present value out of that budget. Switch on the comparison to evaluate a second project side by side and see which ranks higher on PI and which on NPV.
The same ratio is called the benefit-cost ratio (BCR) in public-sector cost-benefit analysis. Cash flows are assumed to arrive at the end of each period, and the discount rate should match the period length you use.
With the default inputs, the profitability index is 1.067. Change any value above to recalculate instantly.
How to use the profitability index calculator
- 1Enter the initial investment made today.
- 2Set the discount rate — your cost of capital or minimum acceptable return.
- 3List the expected cash flow for each future period, separated by commas.
- 4Add any salvage value at the end of the project.
- 5Accept projects with a PI above 1; turn on the comparison to rank two projects.
Formula and method
Each future cash flow CFₜ is discounted back to today by dividing by (1 + r)ᵗ, where r is the discount rate per period and t is the number of periods until the cash arrives. The sum of these present values is divided by the initial investment C₀ to give the profitability index. Because NPV = PV − C₀, the PI can also be written as 1 + NPV ÷ C₀, so PI > 1 exactly when NPV > 0.
PI and NPV always agree on whether a single project is acceptable, but they can rank projects differently: PI favors small projects with high returns per dollar, while NPV favors the project that adds the most total value. When capital is limited, ranking by PI and funding down the list maximizes total NPV for divisible projects. Any salvage value is added to the last cash flow, and cash flows are assumed to occur at period end.
- PI
- Profitability index (benefit-cost ratio)
- C₀
- Initial investment at time 0
- CFₜ
- Cash flow in period t
- r
- Discount rate per period
Worked examples
$100,000 project over 4 years at 10%
Discounting $30,000, $35,000, $40,000 and $30,000 at 10% gives present values of $27,273, $28,926, $30,053 and $20,490, totaling $106,741. Dividing by the $100,000 investment gives a PI of 1.067: each dollar invested returns about $1.07 in today’s money.
Level cash flows that fall short
Five payments of $12,000 total $60,000, but at 12% they are worth only $43,257 today. The PI of 0.865 is below 1 — the project returns about 86.5 cents of present value per dollar — and its 6.4% IRR is under the 12% hurdle.
Ranking two projects under a budget
Project B costs $20,000 and returns $8,000 a year for 4 years, worth $25,359 at 10%, so its PI is 1.268 — higher than project A’s 1.067. Project A still adds more total NPV ($6,741 vs $5,359). With a limited budget, B gives more value per dollar; with ample capital, A adds more wealth.
Frequently asked questions
What is a good profitability index?+
Any PI above 1.0 means the project earns more than the discount rate and adds value, so it is acceptable on financial grounds. Higher is better when comparing projects under a budget limit; a PI of 1.25, for example, means $1.25 of present value for every dollar invested.
What is the difference between profitability index and NPV?+
NPV is the dollar amount of value a project adds; PI is that value expressed per dollar invested (PI = 1 + NPV ÷ investment). They always agree on accept or reject for a single project, but PI can favor smaller projects when ranking, while NPV favors the largest value created.
When should I use the profitability index?+
PI is most useful under capital rationing — when you have a fixed amount to invest and more positive-NPV projects than you can fund. Ranking projects by PI and funding them in order generally maximizes total NPV, as long as projects can be scaled or combined freely.
Is the profitability index the same as the benefit-cost ratio?+
Yes, in most usage. Governments and public agencies call the ratio of discounted benefits to discounted costs the benefit-cost ratio (BCR); in corporate finance the same idea, with costs as the initial investment, is called the profitability index or present value index.
What are the limitations of the profitability index?+
It ignores project scale, so a tiny project with a high PI can look better than a large one that creates far more value. It also depends on the discount rate chosen and can be awkward when a project has large later outflows. Always check NPV alongside it.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.