June 2009 Q5

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November 16, 2014 at 9:20 am #210351
stacie395
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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…
November 16, 2014 at 10:08 am #210391
John Moffat
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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
November 16, 2014 at 10:30 am #210398
stacie395
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Sorry…but what i meant is the profitability index for the 5 projects in part (a)…

Thanks…
November 16, 2014 at 4:33 pm #210469
John Moffat
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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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