The profitability index rule of thumb. Introduction: Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows: Profitability index= ( NPV − Initial investment ) Initial investment If the profitability index is greater than 1, then NPV is positive. If the profitability index is less than 1, then NPV is negative. If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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Answer 1

Question

Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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Answer 2

Question

Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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Answer 3

Question

Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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Answer 4

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Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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Answer 5

Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

Answer 6

Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

Answer 7

Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

Answer 8

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Answer 11

Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CC Ch. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CC Ch. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?

Solution Summary: The author explains the profitability index rule of thumb, which specifies that an investor can invest when the value of a pre-planned project is greater than zero.

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