Let us start by understanding Time Value of Money. We saw that Net Present Value is the Present Value (PV) of all cash flows including initial investment.
You probably noticed that PI has the same variables that is used to calculate the NPV, the only difference is that PI is a ratio.
Let us use the same example we used for the NPV calculation.
Since NPV > 0, we said the investment was good.
PI = NPV(2%,21,-11,40,-10,50) = $83.76 = 3.35
$25 $25
When PI > 1, it means the project has a positive NPV, so the investment is good.
Useful links:
Time Value of Money
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