What is profitability index & how is it calculated?

The profitability index is calculated as the ratio between the present value of future expected cash flows and the initial amount invested in the project. A higher PI means that a project will be considered more attractive. The profitability index (PI) is a measure of a project's or investment's attractiveness.

What is the profitability index (Pir)?

The Profitability Index (PI) or profit investment ratio (PIR) is a widely used measure for evaluating viability and profitability of an investment project. It is calculated by dividing the present value of future cash flows by the initial amount invested.

What is the difference between profitability index and NPV?

The profitability index is similar to calculating the net present value (NPV), with some differences. The main difference between these two methods is that PI is presented as a ratio so that it will not directly indicate the size of the cash flow. The calculation of NPV is carried out in several steps.

What is Pi ratio?

More specifically, the PI ratio compares the present value (PV) of future cash flows received from a project to the initial cash outflow (investment) to fund the project. The formula for calculating the profitability index is as follows. Profitability Index = Present Value of Future Cash Flows / Initial Investment