Fin204

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FIN204 Investment Analysis & Decision Making Assignment 02 Tran Van Trung Hieu Batch 09 E1000125

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SUBJECT CODE: FIN204

STUDENT NO: E1000125

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(Office Use Only)

STUDENT NAME: TRAN VAN TRUNG HIEU

PROGRAMME: Year 2, term 2

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Subject Name: Investment Analysis & Decision Making | Assignment Number: 2 | Due date of assignment: 15 April 2013 Submission date: 3 June 2013 |

DECLARATION: I declare that

* No part of this assignment has been copied from any other
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The NPV is greater than 0, therefore, Maple woods Creation company should replace the old equipment.

QUESTION 2:
How does the profitability index differ from the net present value and when would each method be preferred?
Answer:
Profitability index (PI) and net present value (NPV) is two parameters that use in an investment. However, there are specific differences among them. In fact the, profitability index is considered to be less advantageous than net present value method this is because profitability index has its limitation which is more when compared to net present value.
Profitability index is a useful tool for ranking a project. It attempts to identify the relationship between the costs and benefits of a proposed project. Moreover, Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), and is calculated as:
Profitability Index (PI) = PV of future cash flowsInitital Investment
Follow the Wikipedia’s definition, assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
Rules for selection or rejection of a project: * If PI > 1 then accept the project * If PI < 1 then reject the project
Net present value (NPV) of a time series of cash flows, both incoming and

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