Profitability Index Calculator

Initial Investment:

$

PV of future cash flow:

$
Profitability Index

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 > 1It indicates an investment has potential for profit
PI < 1It indicates that may not be worth pursuing
PI = 1It 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

  1. Enter PV of future cash flow
  2. Initial Investment
  3. Then Click the Calculate button

More Calculator

Economic Profit CalculatorStock average calculator
Net Profit Margin CalculatorStock Profit Calculator
Accounting Profit Calculator