Enter your values in the Profitability Index calculator. The future cash flow for each year (in the third entry box) should be separated by a comma.
How to use this Profitability Index (PI) Calculator?
- Enter the value of the interest rate (without a percentage sign)
- Enter the value of the initial investment
- Enter the future cash flows (if you are calculating PI for multiple years, enter the comma-separated values of the series of future cash flows
- Click on CALCULATE
- You can see the result section below the 'calculate' button which shows the Present Value and Profitability Index for the given investment parameters
What is the Profitability Index (PI)?
The profitability index (PI) is a financial measure used to evaluate the potential profitability of an investment or project. It is computed by dividing the present value of the future cash flows of investment by the initial investment cost.
A PI value greater than 1 indicates that the investment is expected to generate more value than its initial cost. In contrast, a value less than 1 indicates that the investment is expected to generate less value than its initial cost. The higher the PI, the more attractive the investment is considered to be.
How to calculate Profitability Index (PI)?
The profitability index is calculated by dividing the present value of future cash flows by the initial investment.
To calculate the profitability index, follow these steps:
- Determine the present value of future cash flows. This can be done using a discounted cash flow (DCF) analysis.
- Determine the initial investment. This is the amount of money that will be required to start the project or purchase the asset.
- Divide the present value of future cash flows by the initial investment. This will give you the profitability index.
For example, if the present value of future cash flows is $10,000 and the initial investment is $5,000, the profitability index would be 2 (i.e., $10,000/$5,000). This indicates that the project or asset is expected to generate twice the amount of money as the initial investment.
You can put these values in the above profitability index calculator and see the same results.
Why the profitability index is important?
Calculating the profitability index is important because it helps to evaluate the profitability of a potential investment. It considers both, allowing for a more comprehensive assessment of its potential returns. A high profitability index indicates that an investment is likely to provide a good return on investment, while a low profitability index indicates that it may not be as profitable.
This information can help investors make informed decisions about where to allocate their capital and determine which investments are worth pursuing.