Profitability index (PI)

Definition

Profitability index (PI) in plain English

The profitability index is a quick "bang for your buck" score for a project or investment. You take the value TODAY of all the money the project is expected to bring in (already shrunk down to reflect that future money is worth less now), and divide it by the cash you have to put in up front. If the result is above 1, the project creates more value than it costs — a good sign; below 1 means you'd be pouring in more than you get back. It's like checking whether a $5 lemonade stand kit will earn you more or less than $5 in eventual sales, all measured in today's money.

Related Principles of Finance terms

• Behavioral finance
• Capital budgeting
• Dollar-weighted return (IRR)
• Internal rate of return (IRR)
• Net present value (NPV)
• Payback period
• Real option
• Leveraged buyout (LBO)
• MOIC (Multiple on Invested Capital)