Question

Define the profitability index and explain how it may be used a criterion for determining whether to pursue an investment or project

Answer #1

**Profitability index can be defined as an index which
arrives by dividing the the present value of future cash flows by
the initial investment and the same has been shown as
below:**

**= Present value of future cash flows / Initial
investment**

**If the profitability index of a project is greater than
1, it implies that the present value of future cash flows is
greater than the initial investment or in other words the NPV of a
project is positive and hence the firm shall undertake the
project.**

**If the profitability index of a project is less than 1,
it implies that the present value of future cash flows is less than
the initial investment or in other words the NPV of a project is
negative and hence the firm shall not undertake the
project.**

What is profitability Index? Which is a superior
criterion-Profitability Index or Net Present Value?

The profitability index makes up for what drawback to the NPV
method? no objective decision criterion the NPV's reinvestment rate
assumption the lack of consideration of cashflows occurring late in
the project's life the NPV being an absolute (not relative)
measure

Book rate of return and profitability index are the two most
commonly used investment criteria.
True
False
The IRR rules states that you invest if the project IRR is
greater than the opportunity cost of capital.
True
False

1.
Define and describe ratio analysis.
2. Explain how the liquidity, profitability, leverage, and
market ratios are used to analyze and compare financial
statements.

Profitability index
Estimating the cash flow generated by $1 invested in
investment
The profitability index (PI) is a capital budgeting tool that
provides another way to compare a project’s benefits and costs. It
is computed as a ratio of the discounted value of the net cash
flows expected to be generated by a project over its life (the
project’s expected benefits) to its net cost (NINV). A project’s PI
value can be interpreted to indicate a project’s discounted return
generated...

Based on the profitability index rule, should a project with the
following cash flows be accepted if the discount rate is 15
percent? Why or why not? (i.e. Calculate the profitability index
(PI) and explain why the project should or should not be
accepted.)
Year: 0,1,2,3
Cash Flow: -32100, 11,800, 0, 22,600

9. Profitability index
Estimating the cash flow generated by $1 invested in a
project
The profitability index (PI) is a capital budgeting tool that is
defined as the present value of a project’s cash inflows divided by
the absolute value of its initial cash outflow. Consider this
case:
Purple Whale Foodstuffs Inc. is considering investing $2,225,000
in a project that is expected to generate the following net cash
flows:
Year
Cash Flow
Year 1
$350,000
Year 2
$400,000
Year 3...

Explain how a bond portfolio manager may use the duration of the
portfolio to pursue an active investment strategy.

Exercise 11-10 NPV and profitability index LO P3
Following is information on two alternative investments being
considered by Jolee Company. The company requires a 10% return from
its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1)
(Use appropriate factor(s) from the tables
provided.)
Project A
Project B
Initial investment
$
(176,325
)
$
(150,960
)
Expected net cash flows in
year:
1
37,000
26,000
2
55,000
51,000
3
77,295
53,000
4
93,400
78,000
5...

The profitability index (PI) of a project is 1.1, and the
initial investment (cost) is $10,000
. What do you know about the project's net present value (NPV)
and its internal rate of return (IRR)?

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