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Sir John.
This qustn is related to past paper.
I’m little bit confused to calculate the profitability index.
I am calculate by this formula
npv/initial investment.
Data:
Projects Initial investment NPV
($000) ($000)
A. 2500 1000
B. 2200 1550
C. 2600 1350
D. 1900. 1500
E 5000. 0My ans for project A is 1000/2500=0.4
But examiner ans is 1.4, which ans is correct??I cant understand the examiner ans for all projects plz guide me how I calculate the PI for all projects
The profitability index can be stated either way – sometimes the examiner does it one way and sometimes the other.
You can either have NPV/investment or PV of inflows/investment (the second way will always give the same as the first way plus 1; e.g. 0.4 + 1 = 1.4)The ranking and therefore the final answer will be the same whichever way you write it.
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