Whether you are estimating on the spot or checking a result somebody else gave you, the profitability index calculator is the quickest way to get from initial investment, initial investment, discount rate, pv of future cash flow, year1, year10, year2, year3, year4, year5, year6, year7, year8, year9 and one way to total pv of future cash flows, profitability index (pi) and profitability index.
What Is the Profitability Index Calculator?
The profitability index calculator takes initial investment, initial investment, discount rate, pv of future cash flow, year1, year10, year2, year3, year4, year5, year6, year7, year8, year9 and one way and turns them into total pv of future cash flows, profitability index (pi) and profitability index.
It is the kind of calculation you would otherwise do on the back of an envelope: mechanical, repeatable and easy to get subtly wrong without noticing.
How the Profitability Index Figure Is Built
Each result is calculated from the ones before it, so the working is fully visible. That matters when the answer is going to be quoted to somebody else and you need to be able to explain where it came from.
The figures are exactly as good as the assumptions underneath them. Check the rates, the periods and the tax treatment before you rely on the result.
Reading the Result Sensibly
A small change in an input can move the result by much more than you would expect, particularly where the calculation divides by one of the figures you supplied. That is worth understanding before you rely on a figure.
For anything that will be committed to, write the inputs down beside the result. A number you can reproduce is worth far more than one you cannot explain.
A Worked Example
Working through an example, with initial investment set to 10, initial investment set to 5, discount rate set to 2, the calculator returns profitability index (pi) of 10, and total pv of future cash flows of 7.45, and profitability index of 1.49072. Substitute your own figures and the same steps produce the same kind of answer.
Frequently Asked Questions
What do I need to work out total pv of future cash flows?
Enter initial investment, initial investment, discount rate, pv of future cash flow, year1, year10, year2, year3, year4, year5, year6, year7, year8, year9 and one way. The calculator then works through the relationship and reports total pv of future cash flows, profitability index (pi) and profitability index.
What does the profitability index actually calculate?
It takes initial investment, initial investment, discount rate, pv of future cash flow, year1, year10, year2, year3, year4, year5, year6, year7, year8, year9 and one way and converts them into total pv of future cash flows, profitability index (pi) and profitability index using the standard relationship for this problem. Each step is applied in turn, so every output is traceable back to the numbers you typed in.
How should I enter initial investment?
Use the value you actually have, in the unit shown next to the field. Enter every value in the same unit system. The calculator assumes the figures you supply are consistent, so it cannot correct a mistake that happens before the calculation starts.
Is the answer exact?
It is as exact as the formula and the inputs allow. The method itself is the standard one for this problem, so the only sources of error are the figures you enter and the precision you ask for.
Why does a small change in one value move the answer so much?
That happens when an output depends on a ratio, because dividing by a small number magnifies any change in it. Check the units first, then check whether the value you entered is in the range the relationship was designed for.