capital budgeting question - Profitability Index (PI) future, capital, question, budgeting

simeezee

Hi,

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

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


thanks

FVPV

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

spartanag07

thanks. that makes sense