Hi Guys, In the book the forumlas for profitablility index is (NPV/initial cashflow) +1 or (PV of future cashflow)/Initial cashflow. However I don’t understand why they are different. Surely the PV of future cashflow is the same as the NPV. Also why do you add 1 on one of the equiations and not the other.
PV of future cashflows is not the same as NPV of future cashflows.
NPV of Future Cash flows is defined as:
NPV of Future CFs=( PV of future CFs-Inital CF)
Thus:
PV/Initial Value=PV/InitVal-InitVal/InitVal+1=(PV-InitVal)/InitVal+1=NPV/InitVal+1
Note: InitVal/InitVal=1 so you are simply adding zero to the equation.