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This is qs17 in bpp kit ..the answer requires pi to b calculated ..the profitability index is calculated as npv+ initial investment/ initial investment
But the answers for pi are different in kit if I use above formula .in each answer they are deduction the value from 1 ..why is that so ! Can’t we prioritise the investments based on pi values itself !
For example for project po801 initial investment is 620000$ and npv is 55000$…the pi according to the formula above is ,1.088 but kit writes 0.0887 …..please clarify
The profitability index is usually defined as being the NPV / initial investment. However it can also be used as being NPV + initial investment / initial investment.
Unless specified by the question, you can calculate it either way,. Obviously the figure you arrive at will be different, but that does not matter – you still get the marks. And obviously the ranking of projects will be exactly the same whichever of the two measures you use.
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