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Mr Moffat,
May you please clarify how we calculate profitability index (for the project)?
Investment / NPV
or
NPV / Investment
Thank you in advance.
It is NPV / Investment (sometimes the examiner uses PV of future flows / investment, but it doesn’t matter which you use – the ranking and therefore the final answer will be the same.)
I do suggest that you watch our free lecture on capital rationing!!
(Our lectures are a complete course for Paper F9 and cover everything you need to be able to pass the exam well.)
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