NPV versus Profitability Index

The net present value (NPV) and profitability (PI) yield same accept or reject rules, because profitability index (PI) can be grater than one only when the projects net present value is positive. In case of marginal projects, net present value (NPV) will be zero and profitability index (PI) will be equal to one. But a conflict may arise between the methods if a choice between mutually exclusive projects has to be made. Consider the following illustration where the two methods give different ranking to the projects. Project X Present value of cash inflows 200000 $ Initial cash out flow 100000 $ NPV 100000 $ Profitability index 2 Project Y Present value of cash inflows 100000 $ Initial cash out flow 40000 $ NPV 60000 $ Profitability index 2.5 Project X should be accepted if we use the NPV method, but project Y is preferable according to the profitability index (PI). Which method is better? The net present value (NPV) method should be preferred, except under capital rationing, because the NPV reflects the net increase in the firms

wealth. In our illustration, project X contributes all that project Y contributes plus additional NPV of 40000$ (100000$ - 60000$) at an incremental cost of 100000$ (200000$ - 100000$). As the NPV of project Xs incremental outlay is positive, it should be accepted. Project X will also be acceptable if we calculate the incremental profitability index. This is shown as follows: Because the incremental investment has a positive NPV, 40000$ and a profitability index (PI) grater than one, project X should be accepted. If we consider a different situation where two mutually exclusive projects return 200000$ each in terms of NPV and one project costs twice as much as another, the profitability index (PI) will obviously give a logical answer. The net present value method will indicate that both are equally desirable in absolute terms. However, the profitability index (PI) will evaluate these two projects relatively and will give correct answer. Between two mutually exclusive projects will same NPV, the one with lower initial cost or higher PI will be selected.

Difference between ol n fl
Operating leverage relates to the result of different combinations of fixed costs and variable costs. Specifically, the ratio of fixed and variable costs that a company uses determines the amount of operating leverage employed. A company with a greater ratio of fixed to variable costs is said to be using more operating leverage. If a company's variable costs are higher than its fixed costs, the company is said to be using less operating leverage. The way that a business makes sales is also a factor in how much leverage it employs. A firm with few sales and high margins is said to be highly leveraged. On the other hand, a firm with a high volume of sales and lower margins is said to be less leveraged.

Financial leverage arises when a firm decides to finance a majority of its assets by taking on debt. Firms do this when they are unable to raise enough capital by issuing shares in the market to meet their business needs. When a firm takes on debt, it becomes a liability on which it must pay interest. A company will only take on significant amounts of debt when it believes that return on assets (ROA) will be higher than the interest on the loan. A firm that operates with both high operating and financial leverage makes for a risky investment. A high operating leverage means that a firm is making few sales but with high margins. This can pose significant risks if a firm incorrectly forecasts future sales. If a future sales forecast is slightly higher than what actually occurs, this could lead to a huge difference between actual and budgeted cash flow, which will greatly affect a firm's future operating ability. The biggest risk that arises from high financial leverage occurs when a company's ROA does not exceed the interest on the loan, which greatly diminishes a company's return on equity and profitability Read more: http://www.investopedia.com/ask/answers/06/highleverage.asp#ixzz1g7jham5v

OB Difference Between Work Groups and Teams Work Groups Individual accountability Come together to share information and perspectives Focus on individual goals Produce individual work products Define individual roles, responsibilities, and tasks Concern with one's own outcome and challenges Teams Individual and mutual accountability Frequently come together for discussion, decision making, problem solving, and planning. Focus on team goals Produce collective work products Define individual roles, responsibilities, and tasks to help team do its work; often share and rotate them Concern with outcomes of everyone and challenges the team faces

Purpose, goals, approach to work shaped by manager

Purpose, goals, approach to work shaped by team leader with team members