They say writing is 99% perspiration and 1% inspiration. But I'm pretty sure it takes the 1% inspiration to lead the way and it has been evading me for some time now. But today is a new day. It is the 14th of March (3/14). It is being celebrated as Pi day. That's a neat way to help one remember that Pi=3.14. It also happens to be Einstein's birthday. And I found out that Einstein, like Edison, had lived and worked in NJ, which I call home. Now isn't that some inspiration!
Alright, lets get back to Pi, which is the subject of this post. Well, the Archimedian Pi that is being celebrated today is not quite used in Finance, but we can talk about something which sounds exactly the same - PI or the Profitability Index, which is just a twist on the NPV and Time Value of Money
PI can be a rule of thumb to determine if your cash outflow will generate any returns. If your PI > 1, then it is a good investment. If not, it is money down the drain. Click here if you like the math of it all. With all the talk about spending cuts and austerity, I thought this would be a timely topic for discussion.
Spending by itself is not an evil. But the question, "Are we spending too much?" and "Should we be cutting back on our spending?" - whether it be for the government or corporations or personal spending- depends on our answer to the following questions:
1. Is your spending greater than your income? (See Wealth Generation 101 )
2. Is your cash outflow a 'spend' or an 'investment'?
2. Is your PI positive? ( PI > 1 is same as NPV > 0) (See PI Math and Time Value of Money)
Here's wishing us all many positive PI days!
