Question

Problem 12-21 Preference Ranking of Investment Projects [LO12-5]

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:

	Project Number
	1			2			3			4
Investment required	$	(400,000	)	$	(350,000	)	$	(250,000	)	$	(370,000	)
Present value of cash inflows at a 10% discount rate		447,930			490,619			261,279			410,433
Net present value	$	47,930		$	140,619		$	11,279		$	40,433
Life of the project		6 years			12 years			6 years			3 years
Internal rate of return		14	%		18	%		12	%		16	%

Because the company’s required rate of return is 10%, a 10% discount rate has been used in the present value computations above. Limited funds are available for investment, so the company can’t accept all of the available projects.

Required:

1. Compute the project profitability index for each investment project.

2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Answer 1