BAR Capital Budgeting · Updated November 2026
Profitability Index: How Much Present Value Do You Get per Dollar Invested?
Profitability index converts a project's discounted value into a relative value-per-dollar-invested measure.
Core formula
A common formulation divides the present value of future cash inflows by the initial investment.
Relationship to NPV
When the index is above 1, discounted inflows exceed the initial outlay and NPV is generally positive.
Capital rationing
The index can help compare projects when investment capital is limited and management cares about value created per dollar invested.
Ranking caution
A smaller project can have a higher index but create less total dollar value than a larger project with a slightly lower index.
The takeaway
A profitability index above 1 generally corresponds to a positive NPV, but project size and capital constraints still matter.
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FAQ
Does an index above 1 generally imply positive NPV?
Yes.
Is the highest profitability index always the project with highest dollar NPV?
No.
Can the index help when capital is constrained?
Yes.