Profitability index (profit index) is very similar to NPV. It also calculates with the present values of future cash flows and discount rate, therefore it takes in account the time value of money. Profitability index is a ratio which shows if the present value of the cash flows is worth the initial investment. If these values equal (NPV = 0) profitability index will be 1.0. The advantage of using this ratio when comparing different investments is the fact that it tells the proportion of money returned to money invested, rather than the amount as NPV does. This way you can easily compare two investments opportunities which require different initial investments.

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