How do you calculate present value index?
John Hall
Updated on February 24, 2026
In order to determine which project to pursue, the best formula to use is the Present value Index. This is the Present value of cash inflows divided by the Present value of cash outflow: PVI = PV of inflows/PV of outflows.
What is net present value and profitability index?
Net present value tells us what a stream of cash flows is worth based on a discount rate, or the rate of return needed to justify an investment. The profitability index helps make it possible to directly compare the NPV of one project to the NPV of another to find the project that offers the best rate of return.
How do you calculate NPV and PI?
- See Also:
- Use the following formula where PV = the present value of the future cash flows in question.
- Profitability Index = (PV of future cash flows) ÷ Initial investment.
- Or = (NPV + Initial investment) ÷ Initial Investment: As one would expect, the NPV stands for the Net Present Value of the initial investment.
What is PI in capital budgeting?
The profitability index (PI), also known as the profit investment ratio (PIR) or value investment ratio (VIR), is a capital budgeting tool that gauges the potential profitability of an investment or project. The profitability index allows investors to quantify the amount of value created per unit of investment.
Is NPV same as profit?
A positive NPV results in profit, while a negative NPV results in a loss. The NPV measures the excess or shortfall of cash flows, in present value terms, above the cost of funds. NPV can be described as the “difference amount” between the sums of discounted cash inflows and cash outflows.
What does the profitability index tell you?
Definition: Profitability index is a financial tool which tells us whether an investment should be accepted or rejected. PI greater than one indicates that present value of future cash inflows from the investment is more than the initial investment, thereby indicating that it will earn profits.
