PI = \frac{NPV}{I_0} |
where
| Net Present Value | |
| Initial Investment |
The key difference with NPV is that PI shows a value of returns per unit cash invested.
This particularly means that projects with higher NPV may be less attractive in PI terms as it required a high initial investment.
This allows a fair comparison of investment efficiency between two investment projects with different initial investments.
The corporate investment policy usually dictates that:
investment projects with PI <= 1 should be rejected
investment projects with higher PI should have a financing priority over the projects with lower PI