June 2009 Q5 — OpenTuition Forums

Sstacie39511y ago

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...

John MoffatTutor11y ago#1

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

Sstacie39511y ago#2

Sorry...but what i meant is the profitability index for the 5 projects in part (a)... Thanks...

John MoffatTutor11y ago#3

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.