Profitability Index (PI):It is a capital budgeting technique that is used to calculate the profitability of investment projects. It is also known as the benefit-cost ratio. Profitability Index is calculated by dividing the present value (PV) of future cash inflow that is generated from the project by the initial value of investment i. e. the present value of cash outflow. PI = PV of Cash inflow / PV of Cash outflowTherefore, the Profitability Index of a Project is the ratio of the present value of cash inflows to the present value of cash outflow. If the PI is greater than 1, it is considered good and acceptable. If it is equal to one then the project is break-even. if it is less than 1 then the cost is more as compared to the project's benefits. For example, when a company's initial investment i. e. the present value of cash outflow in a project is $5 million and the present value of future cash inflow is $6 million then its Profitability Index will be:PI = PV of cash inflow / PV of cash outflow = $6 million / $5 million = 1. 2In this above example, PI is greater than 1 which means this investment project is profitable for the organization.