Calculate the Profitability index of a capital project. Theinitial investment is $250,000 for the purchase of some new radiologyequipment. The new equipment will save the organization $15,000 a yearfor the next 10 years. The project discount rate is 12%.
Present value of saving = savings per year X discounted rate
Payclose attention here, this is where basic mathematical functions needto follow financial accounting theory. Hence, if we have a positivevalue for the present value of savings, we cannot have a negative NPV.We started with an initial investment amount, so start there aresubtract your net present value from that amount to determine your NPV.
NPV=present value of savings – initial investment
Profitability Index = NPV/initial investment
