Analysis of the return on investment index PI
Posted: Sat Jan 18, 2025 8:13 am
The analysis based on the return on investment index is clear.
Since the incoming cash flow in an effective project must be greater than the investments received, then PI must be higher than 1, that is, the subsidy criterion for PI will be as follows:
we will invest if PI > 1;
we will not if PI < 1.
If the index is equal to 1, this is evidence that the monetary return on investment is zero: the project only returns the invested funds, but does not generate income. In this case, it is necessary to evaluate other parameters of its effectiveness to understand whether donation will be profitable.
Analysis of the return on investment index PI
Source: shutterstock.com
The obtained result can be compared with calculations for other financial instruments or projects. This will allow you to distribute investments or choose between active scaling of your business and passive investment in different assets.
The PI index, by using the discount rate, allows you to take into account risks and estimate the future price of receipts. The difficulty is in choosing the right figure for this ratio.
Example of calculation and analysis of the project profitability index
Let's calculate the return lawyer data package on investment index. Example: the organization JSC Rostorf intends, in addition to extracting and selling the product to end customers, to increase income by increasing the level of raw material processing. According to the business plan, the company is going to purchase new equipment for 40 million rubles. Over the next three years, it is planned to receive a net profit of 34 million rubles in the first year, 30 million rubles in the second, and 38 million rubles in the third. The discount rate (WACC) is 20%.
Information for calculation:
Project start 1 year 2 year 3 year
Cash flow -40 +34 +30 +38
Discount factor 1.00 0.83 0.69 0.58
Present value of cash flow -40 +28.22 +20.70 +22.04
Substituting the data into the formula, we get:
PI = (28.22 + 20.70 + 22.04) / 40 = 70.96 / 40 = 1.77.
The obtained coefficient of economic return on investment is 1.77. This means that each ruble spent on the peat briquette machine will yield 1.77 rubles in the future. The coefficient is more than 1 - the project can be considered effective and implemented if there are no alternatives.
But let's assume that there is another project (alternative), for example, the purchase of additional trucks. This will provide an opportunity to enter a new geographic market. Then for the alternative option, it is necessary to calculate the same index and compare it with the first result. The cost of purchasing trucks will be 20 million rubles. The net cash flow for the project in the first year will reach 16 million rubles, in the second - 18 million rubles, in the third - 22 million rubles.
Information for calculation:
Project start 1 year 2 year 3 year
Cash flow -20 +16.0 +18 +22
Discount factor 1.00 0.83 0.69 0.58
Present value of cash flow -20 +13.28 +12.42 +12.76
We substitute the numbers into the formula and get:
PI = (13.28 + 12.42 + 12.76) / 20 = 38.46 / 20 = 1.92.
That is, the alternative project provides a higher return on investment (in accordance with the obtained index). Its return on investment per ruble is 1.92 rubles versus 1.77 rubles in terms of efficiency in the first option (with the purchase of peat briquette equipment).
Let's compare it with the deposit yield. Today, according to the Central Bank of the Russian Federation, the rate of return on it for a period of more than 12 months is 8.633% - the contributed ruble will bring 8.6 kopecks. This is clearly lower than the yield on the second version of the project (1.92 rubles for each ruble of investment). Of course, in real life, such a comparison is not entirely correct: business is associated with much higher risks than a deposit. It is better to compare projects that are close in risk level.
How to achieve multiple growth in traffic and sales from your website?
Alexey Boyarkin
Dmitry Svistunov
Head of SEO and Development
Read more posts on my personal blog:
I have always been concerned about the issue of moving to a fundamentally new level. So that the indicators would grow not by 2 or 3 times, but by several orders of magnitude. From a thousand visits to ten thousand or from ten thousand to a hundred thousand, if we are talking about a website, for example.
And I know that such leaps are always the result of painstaking work in five areas:
Technical condition of the site.
SEO.
Collection of site semantics.
Creating useful content.
Working on conversion.
And at the same time, every manager needs an increase in sales and the number of applications from the site at the moment.
To get this growth, download our step-by-step template for increasing sales from the site:
Since the incoming cash flow in an effective project must be greater than the investments received, then PI must be higher than 1, that is, the subsidy criterion for PI will be as follows:
we will invest if PI > 1;
we will not if PI < 1.
If the index is equal to 1, this is evidence that the monetary return on investment is zero: the project only returns the invested funds, but does not generate income. In this case, it is necessary to evaluate other parameters of its effectiveness to understand whether donation will be profitable.
Analysis of the return on investment index PI
Source: shutterstock.com
The obtained result can be compared with calculations for other financial instruments or projects. This will allow you to distribute investments or choose between active scaling of your business and passive investment in different assets.
The PI index, by using the discount rate, allows you to take into account risks and estimate the future price of receipts. The difficulty is in choosing the right figure for this ratio.
Example of calculation and analysis of the project profitability index
Let's calculate the return lawyer data package on investment index. Example: the organization JSC Rostorf intends, in addition to extracting and selling the product to end customers, to increase income by increasing the level of raw material processing. According to the business plan, the company is going to purchase new equipment for 40 million rubles. Over the next three years, it is planned to receive a net profit of 34 million rubles in the first year, 30 million rubles in the second, and 38 million rubles in the third. The discount rate (WACC) is 20%.
Information for calculation:
Project start 1 year 2 year 3 year
Cash flow -40 +34 +30 +38
Discount factor 1.00 0.83 0.69 0.58
Present value of cash flow -40 +28.22 +20.70 +22.04
Substituting the data into the formula, we get:
PI = (28.22 + 20.70 + 22.04) / 40 = 70.96 / 40 = 1.77.
The obtained coefficient of economic return on investment is 1.77. This means that each ruble spent on the peat briquette machine will yield 1.77 rubles in the future. The coefficient is more than 1 - the project can be considered effective and implemented if there are no alternatives.
But let's assume that there is another project (alternative), for example, the purchase of additional trucks. This will provide an opportunity to enter a new geographic market. Then for the alternative option, it is necessary to calculate the same index and compare it with the first result. The cost of purchasing trucks will be 20 million rubles. The net cash flow for the project in the first year will reach 16 million rubles, in the second - 18 million rubles, in the third - 22 million rubles.
Information for calculation:
Project start 1 year 2 year 3 year
Cash flow -20 +16.0 +18 +22
Discount factor 1.00 0.83 0.69 0.58
Present value of cash flow -20 +13.28 +12.42 +12.76
We substitute the numbers into the formula and get:
PI = (13.28 + 12.42 + 12.76) / 20 = 38.46 / 20 = 1.92.
That is, the alternative project provides a higher return on investment (in accordance with the obtained index). Its return on investment per ruble is 1.92 rubles versus 1.77 rubles in terms of efficiency in the first option (with the purchase of peat briquette equipment).
Let's compare it with the deposit yield. Today, according to the Central Bank of the Russian Federation, the rate of return on it for a period of more than 12 months is 8.633% - the contributed ruble will bring 8.6 kopecks. This is clearly lower than the yield on the second version of the project (1.92 rubles for each ruble of investment). Of course, in real life, such a comparison is not entirely correct: business is associated with much higher risks than a deposit. It is better to compare projects that are close in risk level.
How to achieve multiple growth in traffic and sales from your website?
Alexey Boyarkin
Dmitry Svistunov
Head of SEO and Development
Read more posts on my personal blog:
I have always been concerned about the issue of moving to a fundamentally new level. So that the indicators would grow not by 2 or 3 times, but by several orders of magnitude. From a thousand visits to ten thousand or from ten thousand to a hundred thousand, if we are talking about a website, for example.
And I know that such leaps are always the result of painstaking work in five areas:
Technical condition of the site.
SEO.
Collection of site semantics.
Creating useful content.
Working on conversion.
And at the same time, every manager needs an increase in sales and the number of applications from the site at the moment.
To get this growth, download our step-by-step template for increasing sales from the site: