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Rebecca Singh says

Can you explain, very simply, what’s the profitability index & how is it calculated? I feel lost because I don’t understand the basics of profitability index.

John Moffat says

You need to watch the main lectures (this is just a quick revision lecture).

ehsanelahi 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

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?)

ehsanelahi says

Dear Sir,

It was quite helpful and appreciate your hardworking.

If the NPV is not given how you will calculate PV of the cash inflow

John Moffat says

By discounting the cash flows as normal!

anamarin 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.

elsie2009 says

Is the point not that we can borrow up to $8500? The objective is to invest as much of the funds for the greater yield.