Question

In: Finance

What is the projects profitability index?

What is the projects profitability index?

Solutions

Expert Solution

Project’s Profitability Index (PI)

-The Project’s Profitability Index (PI) is the ratio of discounted annual cash inflows divided by it’s initial investment cost.

-The Profitability Index (PI) is calculated by dividing the present value of benefits by present value of costs

-It considers the relative size of the initial investment costs.

-Based on Profitability Index Analysis method, the Investment should be selected if the Profitability Index is greater than 1, else the Project should be rejected.

-If the Profitability Index (PI) is greater than 1, then the Project should be accepted.

-If the Profitability Index (PI) is less than 1, then the Project should be rejected.

-The Profitability Index is the ratio of discounted annual cash inflows divided by it’s initial investment cost. The Profitability Index (PI) is calculated by dividing the present value of benefits by present value of costs. It considers the relative size of the initial investment costs.


Related Solutions

Calculating Profitability Index What is the profitability index for the following set of cash flows if...
Calculating Profitability Index What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year Cash Flow 0 −$29,500 1 16,900 2 13,600 3 8,300
Lloyd's Systems is considering the following two projects. Please calculate the Profitability Index for Projects A...
Lloyd's Systems is considering the following two projects. Please calculate the Profitability Index for Projects A and B. (Hurdle Rate = 9.50%)                   Year:                     0             1                2               3               4                        Cash flows-A:     -$2,000      $600          $650          $700          $750                   Cash flows-B:     -$4,000   $1,300        $1,350       $1,400        $1,450
What is the profitability index, and of what value is it?
What is the profitability index, and of what value is it?
Profitability Index Per the strict observance of the rules of Profitability Index, this project would be...
Profitability Index Per the strict observance of the rules of Profitability Index, this project would be accepted because it meets the definition of >1. But as your pointed out, there are other considerations to factor into this decision. Most business decisions have a basis in financial support - or reason for undertaking a project. But there are non-quantitative reasons for undertaking or not undertaking a project... Class What are some non-financial reasons for undertaking a project that has a Profitability...
10. Which is typically higher the regular Profitability Index or the Modified Profitability index for the...
10. Which is typically higher the regular Profitability Index or the Modified Profitability index for the same project?
Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index...
Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project’s cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Happy Dog Soap Company is considering investing $2,225,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $500,000 Year 3 $450,000...
Profitability index           Estimating the cash flow generated by $1 invested in investment The profitability index (...
Profitability index           Estimating the cash flow generated by $1 invested in investment The profitability index ( PI) is a capital budgeting tool that provides another way to compare a project's benefits and costs. It is computed as a ratio of the discounted value of the net cash flows expected to be generated by a project over its life (the project's expected benefits) to its net cost (NINV). A project's PI value can be interpreted to indicate a project's discounted return...
Upton evaluates future projects by using the profitability index. The company is currently reviewing five similar...
Upton evaluates future projects by using the profitability index. The company is currently reviewing five similar projects and must choose one of the following: Project Initial Investment Present Value of Cash Inflows 1 $ 100,000 $ 97,000 2 50,000 80,000 3 75,000 110,000 4 60,000 100,000 5 150,000 200,000 Which project should Upton select if the decision is based entirely on the profitability index? Multiple Choice Project 1. Project 2. Project 3. Project 4. Project 5. q2. The pool rate...
For the following two projects, determine the Payback Period Discounted Payback Net Present Value Profitability Index...
For the following two projects, determine the Payback Period Discounted Payback Net Present Value Profitability Index (Benefit-Cost Ratio) Internal Rate of Return Modified Internal Rate of Return             Project A Project B Year Net Income Cash Flow Net Income Cash Flow 0 (15,000) (19,000) 1 5,000 6,000 3,000 4,000 2 5,000 6,000 5,000 6,000 3 5000 6,000 7,000 8,000 4 5,000 6,000 11,000 12,000 Risk Index 1.80 .60 The firm’s cost of capital ko is 15% and the risk free...
Good Morning Food, Inc. is using the profitability index (PI) when evaluating projects. You have to...
Good Morning Food, Inc. is using the profitability index (PI) when evaluating projects. You have to find the PI for the company’s project, assuming the company’s cost of capital is 9.92 percent. The initial outlay for the project is $368,538. The project will produce the following end-of-the-year after-tax cash inflows of Year 1: $155,548 Year 2: $144,874 Year 3: $15,293 Year 4: $374,481 Round the answer to two decimal places. How do I do this in excel?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT