1. avatar says

    i am not clear how they to calcualate the Profitability index
    A company is the experiencing capital rationing year 0, when only $60000 of investment finance will be available. no capital rationing is excepted in future periods, but none of the three projects under consideration by the company can be postponed. the excepted cash flows od the three projects are as follows.
    PRoject y0 y1 y2 y3 y4
    A (50000) (20000) 20000 40000 40000
    B (28000) (50000) 40000 40000 20000
    C (30000) (30000) 30000 40000 10000
    the cost of capital is 10%.

    i have problem in the present value of inflows. how it is calculated
    Project outlay in year 0 pv
    a 50000 55700
    b 28000 31290
    c 30000 34380

    • Profile photo of John Moffat says

      You get the present value of the cash flows by discounting them at 10% (using the present value tables as normal).
      (I assume that you have studied discounting either in your books or by watching the earlier lectures on here?)

  2. avatar says

    Good evening . I have a question regarding part B of the problem.

    If the company would accept projects B&C NPV =2940$ for an investment of 8000$.(NPV per 1 $ invested = 37c)
    If the company would accept projects A&C NPV=2100$ for an investment of 5000$ (NPV per 1 $ invested = 42 c)
    How sould we judge this ? Which is better B&C or A&C?

    Thank you.

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