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Hi sir,
can i know how to derive at the profitability index…?
i tried by using the net present value / initial investment but can’t get it…
thanks…
In part (a) they are investing in all of 805, 802 and 803, and also in 50% of 806.
The total investment is 1200.The total NPV from this is 123 (although the examiner then writes 124 for some reason 🙂 )
So the profitability index is 124/1200
Sorry…but what i meant is the profitability index for the 5 projects in part (a)…
Thanks…
I was talking about part (a). The answer calculates the profitability index for the whole investment.
The individual profitability indexes are all slightly out – this is because the examiner has calculated the exact NPVs (the NPV’s in the question are all rounded a little). You would not be expected to calculate the exact NPV’s in the exam and the ranking of the investments is not affected.
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