The management found suitable office to buy with a purchase cost of
GHC1,000,000.00; however, 2 years ago, the company lost GHC150,000.00 on similar project which failed.
The company wants to use needs refurbishment before occupation at a cost of GHC250, 000.00 and there will
be annual rates and utility costs payable from year 1 of GHC70,000.00. The company will have static annual
employee costs of GHC135,000.00 together with other identified fixed annual overheads of GHC100,000.00
Ann Marketing Ltd expects to generate sales from 2 new customers each week in year 1 at an average invoice
value of GHC5,000.00. The company’s business plan suggests that, the annual total revenue of year 1 will
increase at 10% per annum from year 2 to 5 without any additional expenditure requirement.
The company has a cost of capital of 8% and a Return of Capital Employed (ROCE) of 15%. Assuming that,
all cash movement will align with profitability.
Profitability index (PI) of the company
Answer: Profitability index = 1.05
since, PI is greater than 1 it is considered a good investment.