1. What is the Profitability Index?

The Profitability Index (PI) is a financial metric used to evaluate the attractiveness of an investment or project. It represents the ratio between the present value of cash inflows and the present value of cash outflows.

2. How Does the Calculator Work?

The calculator uses the Profitability Index formula:

Where:

• \( PV\ Cash\ Inflows \) — Present value of expected cash inflows
• \( PV\ Cash\ Outflows \) — Present value of cash outflows (initial investment)

Interpretation:

• PI > 1 indicates a potentially profitable investment
• PI = 1 means break-even
• PI < 1 suggests the project may not be profitable

3. Importance of PI Calculation

Details: The Profitability Index helps investors and companies prioritize projects when capital is limited. It considers both the magnitude and timing of cash flows, unlike simpler metrics.

4. Using the Calculator

Tips: Enter the present value of cash inflows and outflows in the same currency. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How is PI different from NPV?
A: While both use discounted cash flows, NPV gives absolute dollar value while PI provides a ratio, making it better for comparing projects of different sizes.

Q2: What discount rate should I use?
A: Typically the company's cost of capital or required rate of return. This calculator assumes you've already discounted the cash flows.

Q3: What are limitations of PI?
A: Doesn't account for project scale (a smaller project might have higher PI but lower total profit). Should be used with other metrics.

Q4: Can PI be negative?
A: No, since both numerator and denominator are present values (always positive).

Q5: When is PI most useful?
A: When capital is constrained and you need to compare projects of different sizes.