Meaning and illustrative example
In a simple project with one initial investment, the profitability index shows how much present value of future net receipts corresponds to one unit of investment. The exact formula must be stated: definitions may differ for complex cash flows in opposite directions. If today’s costs are 100 and the present value of future receipts is 120, the index is 1.2 and NPV is 20 under the same assumptions. A relative index does not account for scale in the same way as NPV: a project with a higher index may create less absolute value. Forecasts and the rate remain assumptions.
How to avoid a mistake
For a simple model with one initial investment, PI = PV of future net receipts / I₀. A value above one corresponds to positive NPV only with the same cash flows and rate. Under a limited budget, divisibility and project compatibility must also be considered: a list of high indexes is not yet a feasible plan.
Sources and review boundaries
For more on capital allocation: [the educational analysis](/guides/capital-allocation-decisions/). Support: **gl-mit-pi**. The example is editorial. Sources check the concept, but do not confirm the reliability of anyone’s financial statements or the suitability of a decision for a particular investor.