The profitability index (PI) is a capital budgeting tool that is defined as the present value of a projects cash inflows divided by the absolute value of its initial cash outflow. Consider this case:

Happy Dog Soap Company is considering investing $3,225,000 in a project that is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$325,000
Year 2	$400,000
Year 3	$450,000
Year 4	$400,000

Happy Dog Soap Company uses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this projects PI (rounded to four decimal places):

0.4217

0.4618

0.4016

0.4418

Happy Dog Soap Companys decision to accept or reject this project is independent of its decisions on other projects. Based on the projects PI, the firm should the project.

By comparison, the NPV of this project is . On the basis of this evaluation criterion, Happy Dog Soap Company should in the project because the project increase the firms value.

A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV .