when using the profitability index exclusively calculations greater than 1 0 are ranked based on the highest calculation when limited capital is available and projects are mutually exclusive the project with the highest profitability index is to be accepted as it indicates the project with the most productive use of limited capital 
the profitability index is also called the benefit cost ratio for this reason although some projects result in higher net present values those projects may be passed over because they do not have the highest profitability index and do not represent the most beneficial usage of company assets example of the profitability indeximagine that a company is considering two potential projects building a new factory or expanding an existing one the factory expansion project is expected to cost 1 million and generate cash flows of 200 000 per year for the next 5 years with a discount rate of 10 the new factory project is expected to cost 2 million and generate cash flows of 300 000 per year for the next 5 years also with a discount rate of 10 to calculate the profitability index for the factory expansion project the present value of the future cash flows would be calculated using the following formula 