when using the profitability index to compare the desirability of projects it s essential to consider how the technique disregards project size therefore projects with larger cash inflows may result in lower profitability index calculations because their profit margins are not as high 
the pi or the profitability index measures the costs and benefits of a proposed project it is calculated as the present value of the expected cash flows divided by the cost of the initial investment formula for the profitability indexthe profitability index can be computed using the following ratio the present value of future cash flows requires the implementation of time value of money calculations cash flows are discounted the appropriate number of periods to equate future cash flows to current monetary levels discounting accounts for the idea that the value of 1 today does not equal the value of 1 received in one year because money in the present offers more earning potential via interest bearing savings accounts than money yet unavailable cash flows received further in the future are therefore considered to have a lower present value than money received closer to the present the discounted projected cash outflows represent the initial capital outlay of a project the initial investment required is only the cash flow required at the start of the project all other outlays may occur at any point in the project s life and these are factored into the calculation through the use of discounting in the numerator these additional capital outlays may factor in benefits relating to taxation or depreciation interpreting the profitability indexbecause profitability index calculations cannot be negative they consequently must be converted to positive figures before they are deemed useful calculations greater than 1 0 indicate the future anticipated discounted cash inflows of the project are greater than the anticipated discounted cash outflows calculations less than 1 0 indicate the deficit of the outflows is greater than the discounted inflows and the project should not be accepted calculations that equal 1 0 bring about situations of indifference where any gains or losses from a project are minimal 