The profitability index (PI) quantifies the allure of a project or investment.
The profitability index (PI) quantifies the allure of a project or investment. The present value of anticipated future cash flows is divided by the project's initial investment to determine the PI. The profitability index is determined by dividing the project's original cost by the present value of the projected future cash flows. The project will achieve financial parity if the profitability index is 1. The advantages exceed the costs if it is less than 1.
The profitability index aids in classifying investments and selecting the best one to make. A PI value greater than one implies that the investment will generate profits since the present value of expected future cash inflows from the investment is greater than the initial investment.
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