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

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

Solutions

Expert Solution

Answer:

What is the profitability Index:

The profitability index is a discounted cash flow technique of evaluating the various proposal for capital expenditure in which different cash flow is involved.

The profitability index is also known as the desirability index or present value index method.

Profitability index is calculated as follows:

Profitability Index = Present value of Cash Inflow / Present Value of Cash outflow

The decision of different projects can be taken as follows:

If, Profitability Index < 1	Reject the project
If, Profitability Index >= 1	Accept the project

Value of Profitability Index in the evaluation of the different proposals.

1. The profitability index considered the time value of money & better project evaluation technique.

2. The profitability index is a relative measure of a project's profitability since the Present value of cash inflow is divided by the present value of cash outflow.

ekkarill92 answered 2 years ago

Next > < Previous

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

What is the projects profitability index?

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...

A positive profitability index indicates a positive net present value. True or False

-What is the Profitability Index of a project that costs $28,000 today and is expected to...

-What is the Profitability Index of a project that costs $28,000 today and is expected to generate annual cash inflows of $3,000 for the following 11 years. Use discount rate of 7%. Round to two decimal places. -Installing a solar panel system on your roof comes with a total upfront cost of $18,000 after all tax credits. If the solar panels reduce your utility bill by $1000 per year, what is the Payback Period of installing the solar panel system?...

Calculate the Profitability Index and the Net Present Value of the following project: Year 0 Investment...

Calculate the Profitability Index and the Net Present Value of the following project: Year 0 Investment 75,000 Year 1 Income 25,000 PI ______________ Year 2 Income 35,000 Year 3 Investment 10,000 NPV ____________ Year 4 Income 40,000 Discount Rate 9% Go or No Go?

Use the discounted payback method, the net present value method, and the profitability index method to...

Use the discounted payback method, the net present value method, and the profitability index method to evaluate the following project: Year 0 Initial Investment 900,000 Year 1 Income 175,000 Year 2 Income 450,000 Year 3 Additional investment 100,000 Year 4 Income 630,000 Discount rate 7% DPB __________ years NPV ______________ PI ______________ Would you recommend that the board accept or reject this project? ________________ Accept or reject

Subjects