The Profitability Index (PI) is calculated by dividing the present value (PV) of the future cash inflows by the initial investment. The future cash inflows are an annuity of $200,000 for five years. The present value of an annuity factor for 5 years at a 12% discount rate is calculated as [1 - (1 + r)^-n] / r, which is [1 - (1.12)^-5] / 0.12 ≈ 3.605.

The PV of the cash inflows is $200,000 × 3.605 = $721,000.

The PI is then calculated as:

PI = PV of Future Cash Flows / Initial Investment

PI = $721,000 / $600,000 ≈ 1.2017.

Rounded to one decimal place, the PI is 1.2.

1. Brealey

R. A.

Myers

S. C.

& Allen

F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education. In Chapter 5

Section 5-3

the Profitability Index is defined as the ratio of a project's net present value to its initial investment

often expressed as PI = PV / Investment.

2. Ross

S. A.

Westerfield

R. W.

& Jaffe

J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education. Chapter 7

"Net Present Value and Other Investment Rules

" describes the Profitability Index rule and its calculation as the present value of future cash flows divided by the initial investment.

3. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson. Chapter 21

"Capital Budgeting and Cost Analysis

" details discounted cash flow (DCF) methods

including the formulas for calculating the present value of an annuity

which is essential for determining the PV of future cash inflows in this problem.

4. MIT OpenCourseWare. (2008). 15.401 Finance Theory I

Lecture Notes

Lecture 3: Valuing Projects and Firms. Massachusetts Institute of Technology. The lecture notes define the Profitability Index as PV(Cash Flows) / Initial Investment and discuss its application in capital rationing scenarios.

The total cost of an information request is calculated by summing the costs of the resources consumed by the activity.

1. Professional Staff Cost: The time per request is 15 minutes (0.25 hours). At a rate of $100 per hour, the cost is 0.25 $100 = $25.00.

2. Administration Staff Cost: First, the hourly rate for administration staff is calculated: $75,600 / 6,000 hours = $12.60 per hour. The time per request is 20 minutes (1/3 hour). The cost is (1/3) $12.60 = $4.20.

3. Printing and Posting Cost: This is a direct cost of $1.00 per request.

The total cost is the sum of these components: $25.00 + $4.20 + $1.00 = $30.20.

1. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. Chapter 5

"Activity-Based Costing

" explains the two-stage allocation process

where costs are first assigned to activity cost pools (e.g.

administration) and then to cost objects (e.g.

an information request) using a cost driver rate (pp. 104-108).

2. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education. Chapter 5 discusses the methodology for calculating activity rates

similar to the calculation of the administration staff's hourly rate

and then assigning these costs to products or services based on consumption (pp. 150-155).

3. Kaplan

R. S.

& Cooper

R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press. The book details the principles of ABC

emphasizing tracing resource costs (like staff time and materials) to the activities they perform

which directly aligns with the calculation method used (Chapter 3

"How to Design an Activity-Based Cost System").

Traditional budgeting is characterized by an annual, centralized process. Its primary criticisms are rigidity (inability to adapt to external market changes mid-year), a fixation on cost reduction/variance analysis over value creation, and the pre-allocation of resources ("use it or lose it" mentality), which prevents managers from accessing funds when new opportunities arise.

Beyond budgeting advocates for decentralization and adaptive processes. Its criticisms (or implementation challenges) stem from this flexibility. It requires a radical cultural shift (decentralization) that is structurally difficult to implement. Furthermore, the removal of a fixed central budget creates risks regarding cost control (potential overspending) and relies heavily on local decision-making, which carries the risk of sub-optimal decisions if goal congruence is not achieved.

Hope, J., & Fraser, R. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Harvard Business School Press. (Analysis of traditional budgeting flaws: rigidity, cost focus, pre-allocation).

CIMA (Chartered Institute of Management Accountants). Official Terminology, 2005 Edition. (Definitions of budgeting and control).

ACCA Technical Article. Budgeting – the beyond budgeting approach. Section: "Benefits and problems of beyond budgeting". (Discusses the cultural hurdles and risks of decentralization).

Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of North American budgeting practice. Management Accounting Research, 21(1), 56-75. DOI: 10.1016/j.mar.2009.10.003. (Academic review of implementation difficulties and control risks).

Rickards, R. C. (2006). Beyond Budgeting: Boon or Boondoggle?. Investment Management and Financial Innovations, 3(2). (Discusses the "radical decentralization" risks and lack of fixed spending plans).

Decision trees are diagrammatic representations used to map sequential decisions and chance events, allowing for the calculation of expected values at each node.

Simulation (specifically Monte Carlo simulation) involves building a model and running it through many iterations using random variables to predict the probability distribution of outcomes.

Sensitivity analysis assesses risk by changing one key variable at a time (ceteris paribus) to observe the magnitude of change in the final result (e.g., NPV), identifying which variables are most critical.

Pay-off tables (or matrices) organize data by charting the outcomes (payoffs) for every possible combination of decision alternatives and uncertain states of nature.

Drury, C. (2018). Management and Cost Accounting. 10th ed. Cengage Learning.

Chapter 12: Risk and Uncertainty.

Section 12.3 (Decision Trees): Describes the sequential nature of decisions and events.

Section 12.4 (Sensitivity Analysis): Defines it as analyzing the "responsiveness of the outcome" to changes in input variables.

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis. 15th ed. Pearson.

Chapter 3, Section "Sensitivity Analysis": Defines it as a "what-if" technique examining how a result changes if predicted data is not achieved.

Chapter 21 (Capital Budgeting): Discusses simulation as a tool for risk analysis involving probabilities and iterations.

Luce, R. D., & Raiffa, H. (1957). Games and Decisions: Introduction and Critical Survey. Wiley.

Chapter 2: Discusses the formal structure of decision making under uncertainty, including the use of payoff matrices (tables) to map acts (decisions) against states.

Net Present Value (NPV) is calculated by discounting future cash flows at the cost of capital ($r$); mathematically, as $r$ increases, the present value of inflows decreases, causing NPV to decrease [1]. Discounted Payback relies on these same present values; as they shrink, it takes longer to recover the initial outlay, causing the period to increase [2]. MIRR assumes positive cash flows are reinvested at the cost of capital; a higher rate creates a larger terminal value, causing MIRR to increase [3].

In contrast, Payback Period (undiscounted), Internal Rate of Return (IRR), and Accounting Rate of Return (ARR) are intrinsic metrics derived solely from the project's cash flows or accounting profits. They do not use the external cost of capital in their calculation formulas and thus stay the same [1][2].

Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill Education.Chapter 5 (Net Present Value and Other Investment Rules): Section 5.1 covers NPV's inverse relationship with the discount rate. Section 5.5 covers IRR as a rate intrinsic to cash flows, independent of the market rate.Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.Chapter 5 (Net Present Value and Other Investment Criteria): Page 134 discusses the Payback rule (independent of discounting). Page 136 discusses the Discounted Payback rule.Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice (14th ed.). Cengage Learning.Chapter 10 (The Basics of Capital Budgeting): Page 404, Section 10-5 "Modified Internal Rate of Return (MIRR)". Explicitly defines MIRR using the cost of capital as the reinvestment rate, establishing the direct relationship (Rate $\uparrow$ $\rightarrow$ MIRR $\uparrow$).

Financial: "Operating profit margin" is a traditional lagging indicator of economic success and shareholder value.

Customer: "Average waiting time at check-in desk" directly measures the guest experience; reducing this time improves customer satisfaction.

Internal Business Process: "Average time to clean a standard bedroom" monitors the efficiency and cycle time of the housekeeping operation, a critical internal function.

Learning and Growth: "Percentage of revenue earned from new sources" measures the success of innovation and the organization's ability to adapt and grow (often termed "Innovation and Learning" in academic contexts). This perspective tracks the intangible assets and capabilities required for future sustainability.

ACCA Global. (n.d.). The Balanced Scorecard. Technical Articles, Performance Management (PM). Available at: https://www.accaglobal.com (This source explicitly links "Innovation and Learning" and cites "number of new products" or revenue from new channels as metrics for this perspective in exam contexts).

Kaplan, R. S., & Norton, D. P. (1996). The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press. (Defines the four perspectives and identifies "Revenue from new products" as a diagnostic measure for innovation, often grouped with Learning & Growth in simplified models).

CIMA (Chartered Institute of Management Accountants). (2023). P2 Advanced Management Accounting - Study Text. (Confirming the classification of revenue mix/new product revenue under Innovation/Learning & Growth in standardized testing).

University of Nicosia. (n.d.). Performance Management – The Balanced Scorecard. Courseware/Lecture Notes. (Validates the mapping of operational cycle times to Internal Processes and customer wait times to Customer perspective).