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Unformatted text preview: the hurdle rate hurdle rate. May not include managerial options embedded in the project See in the project. See • Accounts for TVM. Chapter 14. • Considers all cash flows. 57 Certified Financial Controller CFC Net Present Value Profile Net Present Value $000s 15 Sum of CF’s Plot NPV for each discount rate. 10 5 IRR [email protected]% 0 -4 0 58 3 6 9 12 Discount Rate (%) Certified Financial Controller CFC 29 15 Profitability Index (PI) PI is the ratio of the present value of is the ratio of the present value of a project’s future net cash flows to the project’s initial cash outflow. Method #1: CF1 (1+k)1 PI = + CF2 CFn +...+ (1+k)2 (1+k)n ICO << OR >> Method #2: PI = 1 + [ NPV / ICO ] 59 Certified Financial Controller CFC PI Acceptance Criterion PI = $38,572 / $40,000 = .9643 (Method #1, previous slide) Should this project be accepted? No! The PI is less than 1.00. This Th PI Thi means that the project is not profitable. [Reject as PI < 1.00 ] PI 60 Certified Financial Controller CFC 30 PI Strengths and Weaknesses Strengths: Weaknesses: • Same as NPV • Same as NPV • Allows • Provides only comparison of relative profitability different scale ff • Potential Ranking projects Problems 61 Certified Financial Controller CFC Evaluation Summary Basket Wonders Independent Project Wonders Project Metho...
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