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?

Solutions

Expert Solution

The regular Profitability index(PI) is typically higher than the Modified Profitability index(MPI).

Profitability index(PI)

It is measure of project's attractiveness. It represents the relationship between the costs and benefits of a project.

PI = 1 + (NPV / Initial investment)

A project with PI greater than 1 is considered good and can be accepted.

Modified Profitability index(MPI)

The modified profitability index(MPI) is a measure of the value increase per present value dollar of initial commitment. MPI is similar to PI but it adds PV of all future commitments to the denominator.

MPI = 1 + (NPV / (initial outlay + PV of future commitments))

It is preferable to use a MPI, which is calculated by subtracting the cost of capital from the standard PI.

Hence, MPI is lower than PI.

If you have any doubts please let me know in the comments. Please give a positive rating if the answer is helpful to you. Thanks.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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...

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

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...

What is the projects profitability index?

a. What is the profitability index for the cash flows if the relevant discount rate is 10 percent?

Year 0 Cash Flow −$7,400Year 1 Cash Flow $2,700Year 2 Cash Flow $5,400Year 3 Cash Flow $5,000a. What is the profitability index for the cash flows if the relevant discount rate is 10 percent?b. What is the profitability index for the cash flows if the relevant discount rate is 17 percent?c. What is the profitability index for the cash flows if the relevant discount rate is 22 percent?

Which of the following statements is most correct? A. Profitability Index decision rule adjust for the...

Which of the following statements is most correct? A. Profitability Index decision rule adjust for the time value of money B. Payback period decision rule provides information on whether the project is creating value for the firm C. NPV decision rule cannot be used to evaluate mutually exclusive projects D. IRR decision rule is the best method of analyzing mutually exclusive projects Which of the following statements is NOT correct? A. Capital asset pricing model explains the relationship between the...

What is the profitability index, and of what value is it?

11. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability...

11. 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: Purple Whale Foodstuffs is considering investing $2,750,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $500,000 Year 3 $425,000...

Which of the following statement regarding Profitability Index (PI) is correct? you should accept a project...

Which of the following statement regarding Profitability Index (PI) is correct? you should accept a project if PI is greater than 0 you should use PI to compare and select mutually exclusive projects you should accept a project if PI is greater than 1

Subjects