With this tutorial on Texas Instruments BA II Plus, you will learn how to find profitability index for an annuity with constant cash flows.
Profitability index Example
We will illustrate how you can use TI BA II Plus to find profitability index with an annuity that has constant payment. Let's assume McDonalds Corporation purchased a machinery for 52,125. It will save the company $12,000 annually for the next 8 years. The company's cost of capital is 12%. How do we find the profitability index with TI BA II Plus
Profitability index step by step using TI BA II Plus
|Set all variables to default||2nd||reset||enter||RST||0.00|
|Enter number of periods||8||N||N=||8.00|
|Enter interest rate per payment period||12||I/Y||I/Y=||12.00|
|Compute present value (ordinary annuity)||CPT||PV||PV=||59611.68|
|Divide by initial cash outlay||÷||52125||=||PI=||1.14|
Finding profitability index in Excel
Up until Excel 2013, there weren't any financial functions in Excel to find the profitability index or any of the other financial measures of return on investment - ROI. In 2012, tadXL was released to the software market that offered a large number of financial functions to analyze investments. A number of these different functions calculate profitability index of an investment depending on number of attributes that are known about the investment. The trivial one of these financial function find the financial PI with just the cash flows and the discount rate. The more complicated of the profitability index calculations allow for use of different compounding frequencies, the different lengths of time periods for the investment and the various discounting conventions. Not sure what Microsoft is planning for its upcoming Excel 2015 or 2016 yet if it is found that the next version Excel includes a new set of financial functions than more than likely these will be based on the tadXL series of financial functions. I suppose that rightfull owner of original work takes the back bench whereas those who cheat on the exam get the income from work that others started.
Using tadXL functions such as tadPI, tadPISchedule, tadXPI and tadXPISchedule finding profitability index in Excel 2007, 2010 and 2013 becomes really easy. Let us now briefly look at each of these three financial functions in tadXL to find financial PI using Excel:
=tadPI( rate, cash_flows, type, compounding, period, distribution )
=tadPISchedule( rates, cash_flows, type, compounding, period, distribution )
=tadXPI( rate, cash_flows, dates, type, compounding, period, distribution )
=tadPISchedule( rates, cash_flows, dates, type, compounding, period, distribution )