PI

Profitability Index

Short definition

The profitability index is the present value of inflows over the scarce outlay. PI > 1 lines up with NPV > 0; under capital rationing it ranks value per unit of scarce capital.

Detailed explanation

When a budget ceiling binds, raw NPV rewards size. PI shows how many present-value lira each scarce capex lira produces, so the ceiling is filled from the top of the PI list.

An indivisible large project can lose to a bundle of smaller high-PI jobs; that needs integer packaging or a scenario. If outlays are spread over time, the denominator is the PV of the scarce resource, not just I₀.

Why it matters for the CFO

When the year’s capex ceiling is locked by a covenant or a cash cap, the committee should rank by PI, not by the largest NPV.

How it is calculated

PI = PV(girişler) / |PV(çıkışlar)| = 1 + NPV / |I₀|

Numerator is discounted incremental inflows; denominator is the PV of scarce outflows. Equivalent to 1 + NPV/|I₀|.

Variables in the formula

• PI: profitability index
• I₀: present value of the scarce outlay

How to read it

PI = 1.12 means 1.12 of PV (0.12 of NPV) per 1 of outlay. The hurdle is 1; there is no universal “good PI” band. If the scarce resource is management time, not cash, the index measures the wrong scarcity.

Numerical example

NPV = 2 mn TL, I₀ = 10 mn TL → PI = 1.20. A rival with NPV = 3 mn TL and I₀ = 30 mn TL has PI = 1.10; under rationing the first project ranks higher.

Definitions are educational. They are not investment, credit or tax advice.