Profitability index (PI)

Profitability Index (PI) is another sophisticated technique used in capital budgeting decisions. PI is related to NPV as it indicates the net present value (NPV) per each dollar invested. PI is calculated as follows:

PI =

Total present value (PV) of cash inflows divided by Initial investment.

PI is an especially advantageous technique if the company operates under capital rationing. If the PI is greater than one, the project is acceptable.