How to solve – profitability index

The project’s PI (profitability index) is 1.55. The PI is a measure of the return on investment for a particular project, which can be calculated by dividing the present value of expected future cash flows (including terminal value) by the initial cost of that investment. In this case, we need to calculate the sum of all discounted cash flows from years 1 to 11 in order to determine our PV and then divide this figure by the initial cost.

Using an annuity calculator, we can determine that the present value of those expected cash flows would be $118,587 ($15,000 x 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.