capital budgeting question - Profitability Index (PI)

gazhoo · July 14, 2009, 1:53pm

Hi, PI = PV of future cashflows / CFo = 1 + NPV/CFo Can anyone explain how this relationship holds. Where does the 1 + come from? thanks

razedge · July 14, 2009, 2:07pm

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

gazhoo · July 14, 2009, 2:12pm

thanks. that makes sense