Free online Profitability Index Calculator – this helps you determine the profitability index of your investment projects.
What is a Profitability Index?
The profitability index is a financial metric used to measure the potential profitability of an investment or project. Essentially, it is a ratio that compares the present value(PV) of future cash flows to the initial investment.
The purpose of this measure of PI is to help investors and managers determine whether or not a given project has the potential to be profitable.
| PI > 1 | It indicates an investment has potential for profit |
| PI < 1 | It indicates that may not be worth pursuing |
| PI = 1 | It indicates neither gain nor less |
Profitability Index Formula
It is a ratio that compares the present value (PV) of future cash flows to the initial investment.
PI = PV of future cash flow / I
- PI = Profitability Index
- PV = Present Value
- I = Initial Investment
How to Calculate Profitability Index?
First, determine the initial investment and the present value of future cash flow
Example:- you are considering investing in a new manufacturing plant that will require an initial investment of $1,000,000. You estimate that the plant will generate $300,000 per year in cash flows for the next five years. To evaluate the profitability index of this investment.
First, you need to calculate the present value of the future cash flows. Let’s assume you use a discount rate of 10%:
- Year 1: $300,000 / (1+0.1)^1 = $272,727.27
- Year 2: $300,000 / (1+0.1)^2 = $247,933.07
- Year 3: $300,000 / (1+0.1)^3 = $225,393.70
- Year 4: $300,000 / (1+0.1)^4 = $204,903.37
- Year 5: $300,000 / (1+0.1)^5 = $186,374.88
Present Value(PV) of Future Cash Flows = $1,137,332.28
Next, you can calculate the profitability index:
PI = PV of future cash flow / I
Profitability Index = $1,137,332.28 / $1,000,000
Profitability Index = 1.137
Since the profitability index is greater than one(PI > 1), this investment is considered profitable.
How to use a profitability index calculator
- Enter PV of future cash flow
- Initial Investment
- Then Click the Calculate button