Profitability index or p.i., Finance Basics

Assignment Help:

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


Related Discussions:- Profitability index or p.i.

State the classification of new issue market, State the Classification of N...

State the Classification of New Issue Market New market can be categorized as: (i) A market where firms go to the public for the first time through initial public offerin

Uses and application of ratios, Uses and Application of Ratios Ratios ...

Uses and Application of Ratios Ratios are required in the following ways via managers in different firms. 1. Evaluating the efficiency of assets employment to generate sale

Differences between an ordinary annuity and an annuity due, 1. Describe the...

1. Describe the similarities and differences in between an ordinary annuity, an annuity due, and perpetuity.  Provide a methodical answer, including examples to demonstrate your po

Present value of uneven periodic sum - dcf technique, Present Value of Unev...

Present Value of Uneven Periodic Sum - DCF Technique As in investment decisions it is very rare to acquire even periodic returns and in most cases a company will generate a st

Mgmt640, Monroe, Inc., is evaluating a project. The company uses a 13.8 per...

Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project?

Valuation, (Interest-rate risk) Philadelphia Electric has many bonds tradin...

(Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl''s bonds have identical coupon rates of 9.125% but that one issue m

Calculate current ratio, The average of the industry current ratio was 1.86...

The average of the industry current ratio was 1.86 for 2004, 0.86 for 2005, and 0.87 for 2006. Lenovo had higher current ratio than the industry average in 2004. At that time, thei

What are the factors influencing selection of investment, Investment  Attri...

Investment  Attributes/  Factors  Influencing  Selection  of  Investment In  choosing specific  investments,  investors  would require definite  ideas  regarding  features

Differences between equity finance and preference, Differences between Equi...

Differences between Equity Finance and Preference Dissimilarity between Equity Finance and Preference are as follows:   Ordinary share capital

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd