Example

You calculate the total present value of the prospective property's CFBT for the investment holding period at your target rate of return. It comes to $241,838. You will have to invest $229,442. What's the profitability index?

It's 105.4%.

More useful than NPV?

The total present value of the before-tax cash flows for the holding period divided by the equity investment calculate this ratio. It makes NPV analysis more useful and is used by sophisticated analysts who find NPV analysis more useful than IRR analysis.

You calculate the present value at your desired rate of return (discount rate). If the profitability index is more than 1, you have achieved your rate of return. When comparing the profitability indexes of various investment opportunities, the highest indicates the most profitable income property.