Profitability index calculator
By Jude Wallis
The profitability index is the present value of a project's inflows divided by its initial outlay. $11,978.13 of discounted inflows against a $10,000 outlay gives an index of 1.1978 and an NPV of $1,978.13.
Profitability index
1.198
NPV of $1,978.13.
- Profitability index
- 1.1978
- NPV
- $1,978.13
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The formula
Both use the same two numbers. The index divides them and reports value per dollar invested; NPV subtracts them and reports value in dollars.
The index and the NPV always agree
An index above 1 and a positive NPV are the same statement. Here $11,978.13 against $10,000 gives 1.1978 and $1,978.13, and no combination of inputs can make one positive while the other is negative.
So the accept or reject decision is identical either way. What differs is what the number is useful for afterwards, which is where the ratio earns its place. Profitability index against NPV sets out when each is the better report.
Why a ratio helps when capital is limited
With unlimited funding, take every project with a positive NPV and stop reading. With a fixed budget, the question changes: which projects give the most value per dollar of that budget. That is a ranking question, and a ratio ranks while an amount does not.
An index of 1.1978 means every dollar committed returns 1.1978 dollars of present value. Sorting candidate projects by that figure and filling the budget from the top is the standard approach to capital rationing.
The ratio hides the size
The second example is the caution. $15,000 of inflows against a $12,000 outlay is an index of 1.25, better than 1.1978, and an NPV of $3,000, which is more value than the first project's $1,978.13. There, both measures agree.
They do not always. A tiny project can post a spectacular index and add almost nothing, which is why the index ranks and the NPV sizes. Use both, and let the budget decide which one binds.
What sits behind the inputs
The present value of inflows carries all the assumptions: the cash flow forecast, the timing and the discount rate. The index itself is one division. The NPV calculator builds the numerator from a cash flow series, and IRR answers the same question as a rate. This is educational material, not financial advice.
Worked examples
\$11,978.13 of inflows on a \$10,000 outlay
A project costs $10,000 today and its future inflows are worth $11,978.13 once discounted. What are the profitability index and the NPV?
- Index: .
- NPV: .
The profitability index is 1.1978 and the NPV is $1,978.13, so the project creates value.
A larger project with a better index
A second project costs $12,000 and has $15,000 of discounted inflows.
- Index: .
- NPV: .
The index is 1.25 and the NPV is $3,000. Better on both measures than the $10,000 project.
Ranking by index when the budget is not binding
An index of 1.25 beats 1.1978 per dollar, and if both projects can be funded the question was never about ranking. Take every positive NPV project when capital allows it; the index only decides the order when it cannot.
Common questions
Can the index and the NPV disagree on accept or reject?
No. An index above 1 is exactly a positive NPV, because both come from the same two numbers.
Does the outlay include later capital spending?
If spending happens later it should be discounted, either as a negative inflow or inside the outlay. Be consistent about which.
Is this financial advice?
No. It is educational material for the profitability index identity.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.