A project has an initial cost of $50,975, expected net cash inflows of $15,000 per year for 11 years, and a cost of capital of 10%. What is the project’s PI?

How to solve – profitability index

The project’s PI (profitability index) is 1.55. The return on investment (ROI) for a project can be measured by the PI. To calculate it, divide the expected future cash flow value including the terminal value by the investment’s initial cost. We need to divide the PV by the total discounted cash flows for years 1-11 in this example.

An annuity calculation shows that $118.587 is the current value of these expected cash flow flows ($15,000 multiplied by 7.486). Dividing $118,587 by $50,975 gives us our PI of 1.55 – implying that for every dollar invested in this project there will be a return on investment of $1.55 over its lifetime if all other assumptions remain unchanged.