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It is also called as Profit Investment Ratio. It is the ratio of investment to payoff of a proposed project.
Profitability Index (PI)
Profitability Index = PV of future cash flows/ PV of initial investment
The Profitability Index simply answers the question of how much in present value benefits is created per dollar of investment. The PI shows the relative profitability of an investment, or the present value of benefits per the present worth of every dollar invested (the higher ne return for each dollar invested.)
Assuming that the cash flow calculated does not include the investment made in project, a profitability index of 1 indicates break-even. Any value lower than 1 would indicate that the project’s PV is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
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