This profitability index calculator can be used to figure out the benefit to cost ratio of an investment. Profitability index is the present value of future cash flows divided by the initial investment. When the profitability index is greater than 1.0, the present value of cash flows must be greater than the initial investment. Therefore, the investment must also have a positive net present value.
The variables used in our online calculator are defined in detail below, including how to interpret the results.
Initial Investment ($)
This is the initial investment made in order to achieve the subsequent cash flow. This can include the purchase of an asset, or an investment in a security such as a bond.
Cash Flow from Investment ($ / Time Period)
This is the cash flow, or money, that you receive in each time period. A time period can be any length such as a year, quarter, month, week or day.
Number of Time Periods
This is the total number of time periods that you receive the cash flow entered earlier. Please note that the definition (year, quarter, month, week, or day) must be consistent throughout this example.
Opportunity Cost (% / Time Period)
This is the opportunity cost, or alternative, you have in addition to this investment. For example, if you could invest your money in a bond, or place it in a bank account at 4% rate of interest, then your opportunity cost is 4%.
Final Value of the Investment ($)
This is the final value returned to you at the end of the last investment period. For example, if you invested $1,000 in a bond and that $1,000 was returned at the bond's expiration, then enter that amount here. For an asset, this could be the salvage value, or current market value, of the investment. Keep in mind this value can be zero in some cases.
Present Value of Cash Flows ($)
This is the present value of the cash flows from this investment. This value is calculated by discounting the cash flows by the opportunity cost. This value is also used to calculate the profitability index.
Net Present Value of Money ($)
This is the net present value of money, which takes into consideration the time value of money. This value simply discounts the cash flows and final value of the investment by the opportunity cost.
Profitability Index or Benefit Cost Ratio
This is the profitability index, which is also known as the benefit to cost ratio. The profitability index is calculated by taking the present value of cash flows, and dividing it by the initial investment. A profitability index greater than 1.0 means the investment will also have a positive net present value.
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Disclaimer: These online calculators are made available and meant to be used as a screening tool for the investor. The accuracy of these calculations is not guaranteed nor is its applicability to your individual circumstances. You should always obtain personal advice from qualified professionals.
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