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I was attempting a question which required to use the PMI when deciding which projects to undertake when faced with capital rationing. The PMI can be found by dividing the pv of the future cash inflows by the pv of the cash outlay required for the investment. However when checking the answer on the exam kit the PMI is calculated by dividing the npv of the cash inflows by the initial outlay: those two method give contrasting result. which is the correct way of calculating PMI? Is there something I am doing wrong? Many thanks.
You can do either (PV divided by investment; or NPV divided by investment).
The give different numbers obviously, but the ranking of the investments will be exactly the same.
You are welcome 🙂
(It is called the profitability index – not the profitability mass index 🙂 )
PLEASE JOHN Question 18..in BPP STUDY TEXT ALSO ON THIS,(P.I) I really dont understand how they had gotten 3m for initial outlay…been breaking my head and want to move on..is that a mistake?
AND DOES ANYBODY HAVE an idea of which year has P.I..numerical not theory?
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