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Profitability Index (PI)

Business analysisFinancial analysis

Reference model

Profitability Index ScaleA scale of 3 levels rising from the lowest to the highest: 1, Unattractive; 2, Marginal; 3, Attractive.UnattractivePI below 1: discounted inflows areless than the co…MarginalPI equals 1: break-even in presentvalue terms, no…AttractivePI above 1: value is created foreach unit invested…

PI = present value of future cash flows / initial investment. A PI above 1 means the project is expected to create value.

About this model

The Profitability Index (PI) is a capital budgeting measure. It divides the present value of an investment's future cash flows by the initial investment. Each future cash flow is discounted at a rate that reflects the cost of capital and the risk of the project.

Originator not stated.

How to read it

  • A PI above 1 means discounted inflows exceed the cost, so the project adds value.
  • A PI of exactly 1 means the project only breaks even in present value terms.
  • A PI below 1 means the project is expected to destroy value at the chosen discount rate.
  • When capital is limited, rank projects by PI, but check the NPV too.

What this does

Calculates the relative profitability of an investment by comparing the present value of its future cash flows to the initial investment cost. It lets you rank competing projects by value created per unit of capital and decide which to fund.

When to use it

Use it when several investment opportunities compete for a limited capital budget and you need to see which gives the most value relative to its cost.

Not when: Do not use it alone to choose between mutually exclusive projects of very different size, or when cash flows are too uncertain to estimate; use NPV and scenario analysis alongside it.

What happens next

Run a Net Present Value (NPV) analysis and a sensitivity test on the cash flows and discount rate for the projects that pass, then rank the survivors by PI within the capital budget.

Golden thread

Builds on ←

  • Investment overview
  • Cash flow projections
  • Cost of capital

Feeds into →

  • Net Present Value (NPV) analysis
  • Investment decision report

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Drafted with AI and reviewed by Eccellere on 04/11/2026. Guidance, not advice: apply your own judgement.