Profitability Index Calculator
The profitability index formula calculates a project’s profitability based on its future discounted returns relative to the initial investment.(PI) Profitability Index is equal to (PV) Present Value Of future cash flows (INR) Divided to Initial Invesment.
PI = PV of future cash flows / Initial investment,
PI = Discounted benefit / Discounted cost,
let us consider,
- PV is the present value of future cash flows. PV is a method of discounting future cash to its current value.
- Discount rate: Discount rates are determined by the cost of the capital needed to implement a project. If you want to learn more about how to determine discount rates, check out the Weighted average cost of capital (WACC) calculator.
- Initial investment is the cost of capital needed to initiate the project, recorded as the only outflow (-).
Example For Profitability Index
PI = 1 + NPV / initial investment.
The initial investment of $400,000 . The future cash flows of five years from the poultry sales are discounted at a rate of 10%, the total sum of the present value (PV) is $700,000.
PI = PV of Future Cash Flows / initial investment
PI = 4,00,000 / 700,000
The answer is 1.75