Mister, you are the most loved person in Corporate finance among students for years now. I will comment on this video in the name of all videos i have watched to say thank you for everything
To those in the comments worried about npv - the investment you want to choose is the one with the highest npv and above 0. You can do the same thing to calculate the profitability index - your answer would not change. But you are all correct in saying that npv+initial investment/initial investment = profitability index. He may have just gotten the term mixed up, as the calculation of PI only takes pv of cash inflows.
Shouldn't the formula be all PV of cashflows starting yr 1 / by the initial investment? Meaning you don't count the initials investment in the nominator?
Looking at the incremental profitability index can also be helpful. Plot the data (NPV vs Discounted Capital) on an XY graphic. Pick a criteria or hurdle defined as 1+PI. We can easily then determine the incremental PI among the projects.
Dear Sir, shall I deduct from cash inflow the operational cost of the project? for instance every year I have cash inflow (revenue) 10'000 USD per year 5 year, in the year 1 I have operational cost of the project 5000 USD, so while calculating NPV I have to deduct inflow (revenue) with cost of capital i.e discount rate 10% plus 5000 USD?
@@Edspira I think you mean PRESENT VALUE of Cash Flows / Initiatl Investment, not NET Present Value / Initial Investment. Even the above link says the same.
I am a little confused here. What you are calling NPV for instance 875 for project A is actually the total of discounted inflows? Because as i have understood the terms Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. 875 for project A is the discounted inflows after you make the upfront investment of 750 which is the outflow?
You are correct that the NPV is the difference between the present value of cash inflows and the present value of cash outflows. It is basically used to calculate how profitable an investment or project could be. I actually have another video on the calculation of NPV: th-cam.com/video/HFFkFMfotT0/w-d-xo.html I hope this helps!
Thanks for you reply. I have seen the other video on NPV. I was just trying to understand the numbers in the example in this current video. Appreciate the videos.
please tell me what does PI results illustrates...I mean if PI= 1.17 what does it means and what is the unit of 1.17??? Is it 1.17 times 1.17% $1.17 I expect quick response from you side :)
The profitability index has no units. It is basically a comparative measure of how profitable a project is. The higher the PI, the more profitable the project.
Mister, you are the most loved person in Corporate finance among students for years now. I will comment on this video in the name of all videos i have watched to say thank you for everything
this guy's got to be the best teacher I've seen on TH-cam
thanks so much!
agreed. tony bell is also a good one, but he's behind a paywall.
I can say this guy got to be one of the best teacher i have ever seen through my education period. Everything is so clear.
Wow, thanks for the compliment. I never thought that the Hulk would be watching my business videos!
Crystal clear & simple explanation. Amazing videos! Thanks so much
Thank you! This is the best explanation for PI I have found!!
No problem!
Best teacher ever! Thank you so much.. much appreciated.
To those in the comments worried about npv - the investment you want to choose is the one with the highest npv and above 0. You can do the same thing to calculate the profitability index - your answer would not change. But you are all correct in saying that npv+initial investment/initial investment = profitability index. He may have just gotten the term mixed up, as the calculation of PI only takes pv of cash inflows.
Thank you for your all beautifully explained videos.
Your videos are awesome, you make it so simple to follow.. Keep up the good work!!
christopher coromandel
christopher coromandel I agree Christopher this guy is better than my instructor
Then we have to choose project A and D?
Shouldn't the formula be all PV of cashflows starting yr 1 / by the initial investment? Meaning you don't count the initials investment in the nominator?
Looking at the incremental profitability index can also be helpful. Plot the data (NPV vs Discounted Capital) on an XY graphic. Pick a criteria or hurdle defined as 1+PI. We can easily then determine the incremental PI among the projects.
but as far as i know PI= (NPV + initial investment) / initial investment
yeah i also have this question
Dear Sir, shall I deduct from cash inflow the operational cost of the project? for instance every year I have cash inflow (revenue) 10'000 USD per year 5 year, in the year 1 I have operational cost of the project 5000 USD, so while calculating NPV I have to deduct inflow (revenue) with cost of capital i.e discount rate 10% plus 5000 USD?
shouldn't it be (npv+investment)/investment ?
No, it it NPV divided by the investment. Here's an additional source: www.investopedia.com/terms/p/profitability.asp Happy studying!
@@Edspira I think you mean PRESENT VALUE of Cash Flows / Initiatl Investment, not NET Present Value / Initial Investment. Even the above link says the same.
It can be calculated as youve said. It can also be calculated by adding the pv of all cash inflows, divided by initial investment.
Would this be similar then to what the total asset turnover ratio indicates?
You are saving my life...
I am a little confused here. What you are calling NPV for instance 875 for project A is actually the total of discounted inflows? Because as i have understood the terms Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. 875 for project A is the discounted inflows after you make the upfront investment of 750 which is the outflow?
You are correct that the NPV is the difference between the present value of cash inflows and the present value of cash outflows. It is basically used to calculate how profitable an investment or project could be. I actually have another video on the calculation of NPV: th-cam.com/video/HFFkFMfotT0/w-d-xo.html
I hope this helps!
Thanks for you reply. I have seen the other video on NPV. I was just trying to understand the numbers in the example in this current video. Appreciate the videos.
Clear explanation. Thanks
Good explaination.
Thank you for your help!
No problem!
Well explained
Thank you very much 😍
please tell me what does PI results illustrates...I mean if PI= 1.17 what does it means and what is the unit of 1.17???
Is it 1.17 times
1.17%
$1.17
I expect quick response from you side :)
The profitability index has no units. It is basically a comparative measure of how profitable a project is. The higher the PI, the more profitable the project.
thanks
PI= NPV/The initial cash outlay. its very simple
This was dank
what?? this is wrong... its not NPV / initial, its NPV + initial / initial ???????????
this is different than my textbook and prof
its the PV of future cash flows, not NPV
Profitablity index = Present value of cash inflow ÷present value of cash ouflow.
I think it is not actually true because PI = (NPV+Investment)/Investment
god, i love you!!
Thank you my friend!
Oh man I love Profitability Indices....who's with me??
+Bob Shapiro Here here!
Please change the colors.. Black back ground with shiny colors for writing is a disaster.
resourcefull
Thanks!