The profitability index (PI) is the present value of a project’s future cash flows divided by the initial cash outlay.
The profitability index is related closely to net present value. The NPV is the difference between the present value of future cash flows and the initial cash outlay, and the PI is the ratio of the present value of future cash flows to the initial cash outlay.
If the NPV of a project is positive, the PI will be greater than one. If the NPV is negative, the PI will be less than one. It follows that the decision rule for the PI is:
If PI > 1.0, accept the project.