Lecture 19 - Capital Budgeting - NPV and Other Criteria (II)

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Unformatted text preview: 0 1,078 = 1.078 1,000 19-15 The Profitability Index Rule: Details Details Rationale for the PI rule PI compares inflows with outflows If inflows exceed outflows the PI compares inflows with outflows. If inflows exceed outflows, the project is making money On the decision: Minimum acceptance criteria: Accept if PI>1 Minimum acceptance criteria: Accept if PI>1 Ranking criteria: Select project with highest PI Strengths Easy to understand and communicate Correct decision when evaluating independent projects May be useful when available investment funds are limited However, there are problems with the IRR approach Scale problem again with mutually exclusive projects BAFI 355 – Spring 2010 19-16 Suggested Exercises Suggested Exercises Ross, Westerfield and Jaffe (RWJ) 9.10, 9.14, 9.16 (RWJ) BAFI 355 – Spring 2010 19-17...
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This note was uploaded on 05/28/2013 for the course BAFI 355 taught by Professor Mahnic during the Spring '09 term at Case Western.

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