| PI = \frac{NPV}{I_0} |
where
NPV | Net Present Value |
I_0 | Initial Investment |
The key difference with NPV is that PI shows a value of returns per unit cash invested.
This particularly means that some projects with higher NPV may be less attractive in PI terms than lesser NPV projects as they require a high initial investment.
This allows a fair comparison of investment efficiency between two investment projects with different initial investments volumes.
The corporate investment policy usually dictates that:
- investment Projects with PI ≤ 1 should be rejected
- investment Projects with higher PI should have a priority over the projects with lower PI
- investment Projects with lower PI are added up to the Investment Package to reach the pre-set value of affordable Initial Investment (I0)
- investment Projects with lower risk should have a priority over the projects with higher risk
The quantification of Project's is performed individually for each Project based on its nature.
Weighing the Project's risks against PI to include to or exclude from Investment Package is based on the Corporate Investment Policy.