Profitability index or p.i., Finance Basics

Profitability Index or P.I.

P.I. (benefit-cost ratio) = Present value of inflows / Present value of cash outlay

Whether P.I. is greater than 1.0, invest and whereas less than 1.0, reject.

Example

The following information was from XYZ feasibility studies. This has studied two ventures as:

a) Cost 100,000/= and 160,000/= on the starting of the 4th year and it will create inflows 1-3rd year 80,000/= and from 4-6th year 50,000/= per annum.

b) Initial cost 200,000/= and 80,000/= on the starting of the 4th year and it will create the following inflows:

          1st - 2nd year -> Shs.100, 000 per annum

          3rd - 6th year -> Shs.70,000 per annum

Using the cost of finance of 12 percent compute the P.I. of these two ventures, advise the company accordingly.

Solution

a) Outflows: 100,000/1 + 160,000 / (1.12)3 = 100,000 + 113,887 = 213,885

Inflows: 80,000 / (1.12)1/80,000/ (1.12)2 + 80,000 / (1.12)3 + 50,000 / (1.12)4 + 50,000 / (1.12)5 + 50,000 / (1.12)=  Shs.277,626

       P.I. = 277,626/213,885                                        

       P.I. = 1.298

b) Outflows: = 200,000 / 1 + 80,000 / (1.12)3   =  256,944

Inflows = 100,000 / (1.12)1 + 100,000 / (1.12)2 +70,000 / (1.12)3+70,000 / (1.12)4 +70,000 / (1.12) +70,000 / (1.12)6   

  = Shs.338,501

       P.I.    =  338,501 / 256,944                                                

                =  1.32

Posted Date: 1/31/2013 1:15:28 AM | Location : United States







Related Discussions:- Profitability index or p.i., Assignment Help, Ask Question on Profitability index or p.i., Get Answer, Expert's Help, Profitability index or p.i. Discussions

Write discussion on Profitability index or p.i.
Your posts are moderated
Related Questions
A firm just announced that it will cut its dividend from 4.9 dollars per share to 2.1 dollars per share at the end of this year. The dividend was expected to grow 2.7% every year b

Why are financial institutions heavily regulated, with specific focus on their ability to increase or reduce the money supply?

I need report on Corporate Finance. Do you provide help in topic Corporate Finance? I need expert's assistance to solve my college assignment. Please suggest if it works for me.

Private Limited Companies These are NOT permitted to advertise their shares so like to attract public money and so that they sell their shares privately as recognized as priva

Determine the Present Value of An Annuity and give explanation of this topic?????

What is the effective annual cost of skipping the discount and paying at the end of the net period for the following credit terms: 6/10, net 70? please show work"

Management of Account Receivable In order to keep current customers and attract new ones, most firms find it necessary to offer credit. Accounts receivable represents the exte

Finance Functions The functions of Financial Manager can broadly be split into two:  The Managerial Functions and The Routine functions. Managerial Finance Functions

CBK - Monetary Policy The money supply in the economy has a main effect on both the rate of inflation and the level of economic activity. The level of money supply is controll

Business Activity Cycle The interest rates also depend on business cycles as above. Because the economy moves in the four (4) business cycles, such interest rates will shift l