Divide the present value of inflows by the investment to rank projects under a capital constraint.
A profitability index above one is equivalent to a positive NPV. Its advantage appears under capital rationing, where the goal is maximum value per unit of scarce capital rather than maximum total value. Ranking by NPV alone favours large projects; ranking by profitability index allocates a fixed budget to the projects that use it most efficiently.
Profitability Index
Profitability index = present value of inflows ÷ initial investment
Profitability index = present value of inflows ÷ initial investment A profitability index above one is equivalent to a positive NPV. Its advantage appears under capital rationing, where the goal is maximum value per unit of scarce capital rather than maximum total value.
Ranking by NPV alone favours large projects; ranking by profitability index allocates a fixed budget to the projects that use it most efficiently.
This calculator takes 4 inputs: Initial investment, Annual cash inflow, Discount rate, Project life. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.