Profitability Index > Definition > Formula > Example > Calculation

Profitability Index > Definition > Formula > Example > Calculation > Calculator

This web page shed details into the way Profitability Index or PI is used to decide financial viability of an investment. Here you will find a definition, formula, example, calculation with Profitability Index along with a handy calculator. Don't waste time with MS Excel templates - we are sure, here you will find all you need!

How do you define Profitability Index?

Profitability Index is defined as the present value of expected cash inflows over the Initial Cash Outlay. It is a ratio of the present value or cash inflows and ICO. A Profitability Index of one yields the internal rate of return. A Profitability Index of less than one suggests that we should reject the proposal and value of one or greater suggests that investment proposal should be accepted.

What is the formula for Profitability Index ?

Profitability Index Example

Let us examine finding Profitability Index or PI with an example investment proposal. Let us say we were offered a series of cash inflows at the end of each of the next four years as $500, $400, $300, and $100. And the Initial Cost Outlay for this proposal is $1,000 and the discount rate or return is 12%.

Profitability Index @ 12%

Year	NET CASH FLOW	PVIF @ 12%	PRESENT VALUE
Profitability Index at 12%
1	500	0.893	$446.5
2	400	0.797	$318.8
3	300	0.712	$213.6
4	100	0.636	$63.60
		PI = 1.0425	$1,042.50/$1,000

Profitability Index @ 15%

Year	NET CASH FLOW	PVIF @ 15%	PRESENT VALUE
Profitability Index at 15%
1	500	0.870	$435
2	400	0.756	$302.40
3	300	0.658	$197.40
4	100	0.572	$57.20
		PI = 0.992	$992/$1,000

Acceptance Criteria

At 12% the Profitability Index is 1.0425 which is greater than one thus the proposal worth the money yet at 15% discount rate the Profitability Index is 0.992 which is less than 1 thus the proposal should be rejected at this discount rate.

Profitability Index in MS Excel