Capital Budgeting Flashcards
1
Q
Profitability index, explain
A
We use the PI where we have financing for future capex, however we do not have enough funding to finance all the positive future projects. In other words, we have a number of projects that we are willing to accept in respect to their ability to provide a positive future NPV, however, we do not have sufficient financing to do so. Therefore, we use the PI to determine which projects we accept, as we want to maximise the future NPV earned in relation to the financing we have at our disposal.
PI = PV of Project Cash Flow/Cost
2
Q
IRR
A
The discount rate that causes the net present value to equal zero. In other words, where the discounted inflows equal the discounted outflows. Calculated with excel or a financial calculator.
