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Profitability Index, Initial investment and working capital

Ttwistedheat9y ago
Simple question, but do we include working capital in the calculation of Profitability Index ratio? For example if 2m invested in a machine, 500k in working capital immediately with it being returned at the end. NPV is 400k. Would the P.I = 400k/2000k (or if you prefer 2400k/2000k) <-- W.C not included Or would the P.I = 400k/2500k (2900k/2500k) <-- W.C included Also, if we are to include W.C in the Profitability Index, do we then include it as part of any calculations pertaining to divisible rationing? i.e if 6m is available for projects, and we wanted to include 100% of the project above, would we cost it at 2m or 2.5m?
John MoffatJohn MoffatTutor9y ago#1
You would include working partial as per your second answer. However I have never seen an exam question where it has been relevant.
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