# Profitability Index

*Corporate Finance & M&A — Finicade finance glossary*

The profitability index divides the present value of future cash flows by the initial investment, expressing NPV per dollar committed. It's the right tool under capital rationing: when you can't fund every positive-NPV project, ranking by index rather than raw NPV maximises value from a fixed budget. Above 1.0 means the project creates value.

**Formula:** `PI = PV of future cash flows ÷ Initial investment`

**Also known as:** PI, benefit-cost ratio

**Related terms:** [NPV (Net Present Value)](https://finicade.com/glossary/npv), [Capital Budgeting](https://finicade.com/glossary/capital-budgeting), [IRR (Internal Rate of Return)](https://finicade.com/glossary/irr), [Hurdle Rate](https://finicade.com/glossary/hurdle-rate), [Payback Period](https://finicade.com/glossary/payback-period)

Source: https://finicade.com/glossary/profitability-index