How is the profitability index calculated quizlet?
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How is the profitability index calculated quizlet?
Which of the following is the formula used to calculate the profitability index? Profitability index = Present value of net cash flows ÷ Initial investment. present value of net cash flows by the initial investment.
What is the profitability index quizlet?
The profitability index is used for capital rationing. The profitability index is the ratio of the present value of net future cash inflows to the present value of the net initial investment.
When calculating NPV The present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the?
T/F: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power. The basic NPV investment rule is: -If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference.
What is the formula of profitability index?
Profitability Index = (Net Present value + Initial investment) / Initial investment. Profitability Index = 1 + (Net Present value / Initial investment)
In what circumstance is the profitability index helpful quizlet?
The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required. The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.
What is the formula for profitability index?
What is the profitability index How is it calculated?
The profitability index is calculated by dividing the present value of future cash flows that will be generated by the project by the initial cost of the project. A profitability index of 1 indicates that the project will break even. If it is less than 1, the costs outweigh the benefits.
How do you calculate profitability of a project?
Project profit and resource margin are calculated as follows:
- Project Profit = Actual Revenue – Resource Direct Cost – Other Direct Costs.
- Project Margin = (Actual Revenue – Resource Direct Cost – Other Direct Costs) / Actual Revenue.
In what circumstance is the profitability index helpful?
Why is profitability index used?
Description: Profitability index helps in ranking investments and deciding the best investment that should be made. PI greater than one indicates that present value of future cash inflows from the investment is more than the initial investment, thereby indicating that it will earn profits.
How do you calculate PV and NPV?
If the project only has one cash flow, you can use the following net present value formula to calculate NPV:
- NPV = Cash flow / (1 + i)^t – initial investment.
- NPV = Today’s value of the expected cash flows − Today’s value of invested cash.
- ROI = (Total benefits – total costs) / total costs.
How do you calculate NPV factor?
How is the profitability index calculated?
How is profitability ratio calculated?
= Gross profit / Net sales * 100.
