NPV & Profitability Index (PI) Calculator
📘 What is NPV and Profitability Index?
Net Present Value (NPV) is the difference between the present value of cash inflows and outflows over a period of time. It’s a core concept in capital budgeting used to assess the profitability of an investment.
Profitability Index (PI) is a ratio of the present value of future expected cash flows to the initial investment. It shows the value created per unit of investment.
🧠 Formula Used
NPV Formula:
NPV = ∑(R_t / (1 + r)^t) – C₀
Where:
Rₜ = Net cash inflow at time t
r = Discount rate
C₀ = Initial investment
Profitability Index Formula:
PI = (Present Value of Future Cash Flows) / (Initial Investment)
📈 Why is NPV and PI Important?
- NPV helps determine whether a project adds value to the firm.
- PI helps rank multiple projects, especially under capital constraints.
- A positive NPV and PI > 1 indicate an attractive investment.
💡 When to Use
- Project evaluation and selection
- Budgeting decisions
- Comparing mutually exclusive projects