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Asset investment decisions and capital rationing

3.3 Divisible projects and the profitability index (PI)

If a project is divisible then any proportion of the project may be
undertaken and the returns from the project are expected to be
generated in exact proportion to the amount of investment undertaken.
(e.g. develop a whole plot of land or share the investment with another
developer and develop 50% each)

The profitability index (PI) can be used to rank projects against each other in order to
determine which ones to undertake to maximise the total NPV earned from the
available capital.

PI formula:

NPV
–––––––––––––––
Profitability Index =
Initial investment

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