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simeezee

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tT
发表于 2011-7-13 13:25 | 只看该作者

capital budgeting question - Profitability Index (PI)

future, capital, question, budgeting
Hi,

PI = PV of future cashflows / CFo = 1 + NPV/CFo

Can anyone explain how this relationship holds. Where does the 1 + come from?


thanks
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FVPV

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发表于 2011-7-13 13:25 | 只看该作者
NPV = - initial outlay(same as CFo) + PV of future cash inflows.

=> PV of future cash inflows = NPV + initial outlay(same as CFo)

now plug this equation in PI equation and you will get the answer

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spartanag07

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发表于 2011-7-13 13:25 | 只看该作者
thanks. that makes sense

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