Profitability index - What is the profitablility index? Orchid Biotech Company i

Question

Profitability index - What is the profitablility index?

Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the projects. Given a wide variety of staffing needs, the company has also estimated the number of research scientists required for each development project (all cost values are given in millions of dollars). Initial Capital Number of Research Project Number (s) NPV (S) Scientists 15 15 20 30 10.1 19.0 22.0 25.0 60.2 12 a. Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects? h e..nnnen .h.. a. Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects? The profitability index for Project is (Round to two decimal places.)

Explanation / Answer

The PI rule selects projects 2, 3 and 5. These are also the optimal projects to undertake (as the budget is used up fully taking the projects in order)

Project Number NPV PI Headcount NPV/ Headcount 1 10.1 1.01 2 5.1 2 19 1.27 3 6.3 3 22 1.47 4 5.5 4 25 1.25 3 8.3 5 60.2 2.01 12 5.0

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