The profitability index (PI), which is occasionally called benefit-cost ratio, provides the
relative profitability of a project.
The idea underlying the PI is to measure the project’s “bang for the buck.” By scaling
(dividing) the present value of the future cash flows by the amount of the initial outlay that is
necessary to get the return, you can see how much return is obtained per dollar invested.
Thus with a PI of 1.24, you get $1.24 of present value back for each $1 interested, or an NPV of
$0.24 for each $1 invested (Emery and Finnerty, 1997, p. 355).
If the PI is greater than 1.0 it is acceptable, and the higher the PI, the higher the project
should be ranked when compared to other possible investments. This is the PI formula: