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Anika [276]
3 years ago
15

What is the opportunity coast in using pi over npv?

Business
1 answer:
salantis [7]3 years ago
4 0

<span>Topics Reference Advisors Markets Simulator Academy</span>  Profitability Index<span>By Investopedia</span><span> SHARE </span><span> </span><span>                                     Chapter One                                     Chapter Two                                     Chapter Three                                     Chapter Four                                     Chapter Five                              </span><span>Chapter One Chapter Two Chapter Three Chapter Four Chapter Five</span><span><span>4.1 Net Present Value And Internal Rate Of Return4.2 Capital Investment Decisions4.3 Project Analysis And Valuation4.4 Capital Market History4.5 Return, Risk And The Security Market Line</span><span>4.1.1 Introduction To Net Present Value And Internal Rate Of Return4.1.2 Net Present Value4.1.3 Payback Rule4.1.4 Average Accounting Return4.1.5 Internal Rate Of Return4.1.6 Advantages And Disadvantages Of NPV and IRR4.1.7 Profitability Index4.1.8 Capital Budgeting</span></span>
A profitability index attempts to identify the relationship between the costs and benefits of a proposed project. The profitability index is calculated by dividing the present value of the project's future cash flows by the initial investment. A PI greater than 1.0 indicates that profitability is positive, while a PI of less than 1.0 indicates that the project will lose money. As values on the profitability index increase, so does the financial attractiveness of the proposed project.

The PI ratio is calculated as follows:

<span>PV of Future Cash Flows
</span>Initial Investment

A ratio of 1.0 is logically the lowest acceptable measure for the index. Any value lower than 1.0 would indicate that the project's PV is less than the initial investment, and the project should be rejected or abandoned. The profitability index rule states that the ratio must be greater than 1.0 for the project to proceed.

For example, a project with an initial investment of $1 million and present value of future cash flows of $1.2 million would have a profitability index of 1.2. Based on the profitability index rule, the project would proceed. Essentially, the PI tells us how much value we receive per dollar invested. In this example, each dollar invested yields $1.20.

The profitability index rule is a variation of the net present value (NPV) rule. In general, if NPV is positive, the profitability index would be greater than 1; if NPV is negative, the profitability index would be below 1. Thus, calculations of PI and NPV would both lead to the same decision regarding whether to proceed with or abandon a project.

However, the profitability index differs from NPV in one important respect: being a ratio, it ignores the scale of investment and provides no indication of the size of the actual cash flows.

The PI can also be thought of as turning a project's NPV into a percentage rate.

(Find some profitable ideas in <span>8 Ways To Make Money With Real Estate</span> and Outside The Box Ways To Get Money.)
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______ ratios measure how much operating income an organization is able to generate relative to assets, owners' equity, and sale
tankabanditka [31]

According to business strategy, the <u>Profitability</u> ratios measure how much-operating income an organization can generate relative to assets, owners' equity, and sales.

<h3>What are Profitability ratios?</h3>

Profitability ratios s a form of financial method or procedure in which firms assess or evaluate the ability to generate income or revenue based on the capacity and resources.

<h3>Different types or methods of Profitability ratios:</h3>

  • Gross Profit Ratio
  • Operating Ratio
  • Operating Profit Ratio
  • Net Profit Ratio
  • Return on Investment

Hence, in this case, it is concluded that the correct answer is "<u>Profitability ratio."</u>

Learn more about the Profitability ratio here: brainly.com/question/25253887

4 0
2 years ago
If Hazel decides to sell the best ice cream on earth, and intends to establish a strong ethical climate in her organization, dur
statuscvo [17]

Answer: Planning

 

Explanation: Planning refers to the process of setting goals and procedures and determining the need of resources to accomplish those goals.

In the given case, Hazel has already set her goal of providing the best ice cream in the market. Now she needs to set the procedures of how she can do so in an ethical manner. She has to determine the processes and rules she need to make to achieve the objective of ethical culture in her organisation.

Hence from the above we can conclude that in the planning phase.

8 0
3 years ago
Consider the following information: Portfolio Expected Return Beta Risk-free 6 % 0 Market 10.2 1.0 A 8.2 1.4 a. Calculate the re
denpristay [2]

Answer:

a. 11.88%

b. -3.68%

Explanation:

Given that

Risk free rate = 6%

Beta = 1.4%

Market rate = 10.2%

Risk free rate = 6%

Alpha return = 8.2%

a. The computation of expected return of portfolio is given below:-

= Risk free rate + Beta (Market rate - Risk free rate)

= 6% + 1.4% (10.2% - 6%)

= 11.88%

b. The calculation of Alpha of portfolio is shown below:-

= Alpha return - Expected return

= 8.2% - 11.88%

= -3.68%

6 0
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If you are in a car accident caused by someone else who also has insurance, which type of insurance plan will not require you to
lord [1]
Answer would be Either A or B
4 0
3 years ago
Which of the following attributes of a competitor is important in strategic planning?
emmasim [6.3K]
I think the answer is all of the above
8 0
3 years ago
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