Startup & fundraising
Profitability Index (PI)
Formula reviewed by Tahir Asif, CMA
The present value of a project’s future cash flows divided by its initial outlay: how many dollars of value the project creates per dollar invested.
Profitability index restates NPV as a ratio: present value of future cash flows ÷ outlay. A PI above 1 means the project is expected to create value, matching a positive NPV, and a PI below 1 means it is not.
Because it is a ratio, PI is useful for ranking projects when capital is limited and not every positive-NPV project can be funded: taking the highest-PI projects first usually gets the most value from a fixed budget.
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