A negative NPV will correspond with a profitability index that is below one.įor example, a project that costs $1 million and has a present value of future cash flows of $1.2 million has a PI of 1.2. In general, a positive NPV will correspond with a profitability index that is greater than one. The profitability index rule is a variation of the net present value (NPV) rule. If it is above 1, the venture should be profitable.įor example, if a project costs $1,000 and will return $1,200, it's a 'go.' PI vs. If it is less than 1, the costs outweigh the benefits. A profitability index of 1 indicates that the project will break even. The profitability index is calculated by dividing the present value of future cash flows that will be generated by the project by the initial cost of the project. Understanding the Profitability Index Rule
