1. What is the Profitability Index?

The Profitability Index (PI) is a financial metric used to evaluate the attractiveness of an investment or project. It represents the ratio between the present value of future cash flows (NPV) and the initial investment cost.

2. How Does the Calculator Work?

The calculator uses the Profitability Index formula:

Where:

• \( PI \) — Profitability Index (unitless)
• \( NPV \) — Net Present Value (USD)
• \( Project\ Cost \) — Initial investment cost (USD)

Interpretation:

• PI > 1 indicates a potentially profitable project
• PI = 1 means the project breaks even
• PI < 1 suggests the project may not be profitable

3. Importance of PI Calculation

Details: The Profitability Index helps compare projects of different scales and is particularly useful when capital is limited (capital rationing). It complements other metrics like NPV and IRR in capital budgeting decisions.

4. Using the Calculator

Tips: Enter the project's NPV in USD and the total project cost in USD. Both values must be positive numbers, with project cost greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What's a good Profitability Index value?
A: Generally, PI > 1 indicates a good investment. Higher values represent more attractive projects.

Q2: How does PI differ from ROI?
A: While both measure profitability, PI considers the time value of money (through NPV) whereas basic ROI doesn't.

Q3: When should PI be used over NPV?
A: PI is better when comparing projects of different sizes, while NPV shows absolute dollar value.

Q4: Can PI be negative?
A: Yes, if NPV is negative (which would indicate a poor investment).

Q5: What are the limitations of PI?
A: PI doesn't account for project scale (a small project with high PI might be less valuable than a large project with moderate PI).