Profitability index

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(PI).

Investment appraisal

The profitability index of a project or other proposed investment may be represented by the following formula:

Profitability index = PV/Co

Where:

PV = the present value of all the cashflows except the initial investment.

Co = the absolute value of the initial investment.


Calculated on this basis, projects with a PI > 1 are acceptable.


Alternative definition

The profitability index may also be represented by the following alternative formula:

Profitability index = NPV/Co

Where:

NPV = net present value of all positive and negative cashflows, including the initial investment outflow Co


When defined on this alternative basis, the minimum threshold of acceptability becomes a profitability index of 0.


See also