Answers the Question
Is a given project worthy of investment?
Calculator for Profitability Index
What Is the Profitability Index?
The profitability index is a measure of how much of a return on investment is offered by each project.
- Values above 1 indicate that a project is profitable (the higher the better)
- Values equal to 1 are breakeven
- Values below 1 represent a loss on investment
Why Is it Important?
- Many businesses can not fund every project that is under consideration. In fact, many projects aren't even worth pursuing at all.
- The profitability index can be used to compare projects and evaluate them independently.
Formula(s) to Calculate Profitability Index
- PROFITABILITY INDEX = PRESENT VALUE OF CASH FLOW / INVESTMENT
- Some projects have a strategic value beyond mere profitability.
- Some project may require resources (such as particular staff) that are not directly an input in the equation.