Profitability index vs NPV
The profitability index is the present value of inflows over the outlay. NPV is that surplus in money. Five receipts of $3,000 against a $10,000 cost are worth $11,978.13 at 8 percent, so PI is 1.1978 and NPV is $1,978.13.
| Profitability index | Net present value | |
|---|---|---|
| What it returns | A ratio. 1.1978 on the machine at 8 percent. | A surplus in today's money. $1,978.13 on that sheet. |
| Accept or reject | Accept when PI is above 1. | Accept when NPV is above 0. Same decision on a conventional project. |
| At 12 percent | Inflows $10,814.33, PI 1.0814. | NPV $814.33. Still positive, less room. |
| Later cash, same total | Inflows $11,365.14, PI 1.1365. | NPV $1,365.14, below the level machine. |
| Scale the project by two | PI does not move. Both sides of the ratio doubled. | NPV doubles. Size is in the unit. |
| When you would pick it | Value per dollar outlaid, the capital-rationing ranking. | Dollars of surplus, the ranking when outlays are not the constraint. |
On this page
One surplus, a ratio and a pile
PI is . NPV is $1,978.13, which is times the $10,000 outlay. How the profitability index works is the division. How NPV and IRR work is the surplus. They cannot disagree on accept or reject for a conventional project with a positive outlay.
The NPV calculator on both pages is the present values.
Ranking is where they can split
When outlays differ, PI ranks value per dollar and NPV ranks dollars. Scale the machine by two and NPV doubles while PI stays 1.1978. The back-loaded series has the same $10,000 outlay, so they still rank it below the level machine: PI 1.1365 against 1.1978, NPV $1,365.14 against $1,978.13.
This is educational material, not financial advice.
Worked examples
The machine at 8 percent
$10,000 outlay, five receipts of $3,000, 8 percent. PI and NPV?
- Inflows worth $11,978.13.
- PI 1.1978. NPV $1,978.13.
PI is 1.1978. NPV is $1,978.13. Inflows are worth $11,978.13 against a $10,000 cost.
The same machine at 12 percent
Same series, 12 percent. PI and NPV?
- Inflows worth $10,814.33.
- PI 1.0814. NPV $814.33.
PI is 1.0814. NPV is $814.33. Inflows are worth $10,814.33.
Later cash, same total
$10,000 outlay, receipts $1,000 through $5,000, 8 percent. PI and NPV?
- Inflows worth $11,365.14.
- PI 1.1365. NPV $1,365.14.
PI is 1.1365. NPV is $1,365.14. Inflows are worth $11,365.14.
Common questions
Is PI above 1 the same as NPV above 0?
For a conventional project with a positive outlay, yes.
Which ranking should I use?
NPV in money when projects do not share a scarce outlay. PI when they do. This page will not pick the budget.
Is 1.1978 a hurdle?
It is $11,978.13 over $10,000 at 8 percent on the teaching sheet. This is educational material, not financial advice.
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.