# Profitability Index Explained

Knowing the profitability index rule is very important to know which investment opportunity should be grabbed and which one should be left. Here, with the help of a formula, let us try and understand this concept in detail.

Charlie S

Last Updated: Jan 29, 2019

How to Calculate Profitability Index?

As mentioned earlier, the profitably index can be calculated by knowing the amount to be invested. So, you need to first decide how much you will be investing for getting the desired returns in the future. Then the next step involves calculating the net present value of the income from the investment.

**Profitability Index = Present value of cash flows/Total initial investment**