Free profitability index calculator. Measure value per dollar invested, rank capital budgeting projects, and optimize limited investment capital using the PI ratio.
The Profitability Index (PI) measures the value created per dollar invested. PI = PV of Future Cash Flows / Initial Investment. A PI of 1.25 means every $1 invested generates $1.25 in present value — a 25¢ profit per dollar.
PI is especially powerful when you have limited capital and must choose among multiple projects. While NPV tells you the total value created, PI tells you the efficiency of each dollar committed. Rank projects by PI and fund from highest to lowest until your budget is exhausted.
This calculator computes PI for up to 5 projects simultaneously, ranks them, and shows the optimal project portfolio under a budget constraint. Because PI normalizes returns per dollar invested, it is especially useful when you have more attractive projects than budget to fund them. Ranking projects by PI and selecting from the top down until the budget is exhausted maximizes total portfolio NPV, a strategy known as capital rationing that is used extensively by private equity firms, corporate finance teams, and government agencies allocating limited resources.
When capital is limited (which it almost always is), the project with the highest NPV isn't necessarily the best choice. A smaller project with a higher PI may create more value per dollar. PI-based capital rationing maximizes total portfolio NPV within your budget. It ensures every dollar of limited capital goes to the highest-returning opportunities available.
PI = PV of Future Cash Flows / Initial Investment NPV = PV − Investment = Investment × (PI − 1) Decision Rule: PI > 1 → Accept; PI < 1 → Reject; Rank by PI for capital rationing
Result: PI = 1.250 | NPV = $25,000
PI = $125K / $100K = 1.25. Every dollar invested returns $1.25 in present value. NPV = $125K − $100K = $25K. With a PI of 1.25, this project creates 25 cents of value per dollar invested.
Budget: $500K. Projects: A ($200K, PI=1.4), B ($300K, PI=1.3), C ($250K, PI=1.2), D ($150K, PI=1.5). Ranking: D (1.5), A (1.4), B (1.3), C (1.2). Select D ($150K) + A ($200K) + remaining $150K of B if divisible. This maximizes total NPV.
PI assumes projects are independent and divisible. In reality: (1) some projects are mutually exclusive, (2) you can't do "half" a factory, (3) some projects have dependencies (must do A before B). Integer programming or scenario analysis handles these complexities.
Some analysts use MPI = NPV / Investment instead of PV / Investment. MPI directly shows profit per dollar rather than total return per dollar. MPI = PI − 1. Both rank projects identically.
Use NPV for accepting/rejecting individual projects and choosing between mutually exclusive alternatives. Use PI for ranking independent projects when you have a limited capital budget. PI maximizes the total NPV you can extract from a constrained budget.
PI is always positive because both the numerator (PV of cash flows) and denominator (investment) are positive amounts. A PI between 0 and 1 indicates the project's discounted cash flows are less than the investment — a negative NPV, which means reject.
PI ranking can give wrong answers for mutually exclusive projects. A small project with PI = 1.5 ($100K invested) creates only $50K NPV, while a large project with PI = 1.3 ($1M invested) creates $300K NPV. Use NPV for mutual exclusivity, PI for independent ranking.
Capital rationing means you have a fixed budget and can't fund all positive-NPV projects. Steps: (1) calculate PI for each project, (2) rank from highest to lowest PI, (3) select projects down the list until the budget is exhausted. This maximizes total NPV per dollar.
Any PI > 1 is good (positive NPV). In practice: PI 1.0-1.1 = marginal, PI 1.1-1.3 = solid, PI 1.3-2.0 = very good, PI > 2.0 = excellent. Industries with capital-intensive projects (mining, oil) often accept PI > 1.1, while tech companies may require PI > 1.5.
Discount each year's cash flow: PV = CF₁/(1+r) + CF₂/(1+r)² + ... + CFₙ/(1+r)ⁿ. Use our NPV calculator to compute PV of cash flows with specific year-by-year amounts, then divide by initial investment to get PI.