Profitability Index (PI)

Measured as

PI = PV(inflows) / initial investment

Misused when

Using PI to choose between mutually exclusive projects of different scale (compare NPV too).

Operator takeaway

• PI > 1 implies positive NPV; PI < 1 implies negative NPV.
• Use PI to rank projects when you can't fund everything (capital rationing).
• Tie Profitability Index (PI) to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
• Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.

Next decision

• Quantify the impact with Investment Decision Calculator if you need to turn the definition into an operating assumption.
• Read Investment decision metrics: NPV vs IRR vs payback vs PI if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.