Profitability Index (PI)

Capital Budgeting
Updated Apr 2026 • Has calculator

The ratio of the present value of future cash inflows to the initial investment cost.

What is Profitability Index?

The profitability index (PI), also called the benefit-cost ratio, measures how much value is created per dollar invested. PI equals the present value of all future cash flows divided by the absolute value of the initial investment. A PI above 1.0 means the project creates value (equivalent to a positive NPV); a PI below 1.0 destroys value. PI is particularly useful for capital rationing — when a company must choose among multiple positive-NPV projects with a limited budget, ranking by PI ensures the highest value per dollar is selected first.

Formula

PI = PV of Future Cash Flows ÷ |Initial Investment|

Worked Example

Worked example — Capital Project — CFA Curriculum Illustration

Same 5-year project at 10% hurdle rate

Step 1  Initial investment: −$500,000
Step 2  PV of future inflows at 10%: $558,300 (NPV of $58,300 + $500K initial)
Step 3  PI = $558,300 ÷ $500,000 = 1.117
Step 4  → The project creates $1.117 in value for every $1.00 invested

Source: CFA Institute — Corporate Finance, 4th ed., Capital Budgeting (2024-01-01)

Calculate Profitability Index

Enter comma-separated cash flows starting at t=0. CF₀ must be negative. E.g.: -500000, 120000, 150000, 180000, 160000, 130000

Cost of capital or hurdle rate

Profitability Index

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Not investment advice.

How to Interpret Profitability Index

< 1
PI < 1 — destroys value; project should be rejected
1 – 1
PI = 1 — exactly meets hurdle rate; marginal
1.01 – 1.5
PI 1.0–1.5 — creates moderate value
> 1.5
PI > 1.5 — strong value creation per dollar invested

📚 Capital Budgeting — Complete the path

  1. NPV
  2. IRR
  3. MIRR
  4. Payback Period
  5. Discounted Payback
  6. Profitability Index
Sources
  1. CFA Institute — Corporate Finance, 4th ed., Capital Budgeting
  2. Damodaran, A. — Investment Valuation, 3rd ed.
  3. Investopedia — Profitability Index