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

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
$
(570,000
)
$
(500,000
)
$
(370,000
)
$
(340,000
)
Present value of cash inflows at a 11% discount rate
603,219
584,233
385,015
366,546
Net present value
$
33,219
$
84,233
$
15,015
$
26,546
Life of the project
6 years
12 years
6 years
3 years
Internal rate of return...

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
$
(450,000
)
$
(540,000
)
$
(390,000
)
$
(340,000
)
Present value of cash inflows at
a 8% discount rate
549,775
715,947
416,102
399,353
Net present value
$
99,775
$
175,947
$
26,102
$
59,353
Life of the project
6 years
12 years
6 years
3 years
Internal rate of return...

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
$
(560,000
)
$
(510,000
)
$
(410,000
)
$
(350,000
)
Present value of cash inflows at
a 11% discount rate
592,636
577,822
452,691
440,021
Net present value
$
32,636
$
67,822
$
42,691
$
90,021
Life of the project
6 years
12 years
6 years
3 years
Internal rate of return...

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
$
(550,000
)
$
(500,000
)
$
(400,000
)
$
(520,000
)
Present value of cash inflows at a 11% discount
rate
617,520
664,110
463,140
628,320
Net
present value
$
67,520
$
164,110
$
63,140
$
108,320
Life
of the project
8 years
16 years
8 years
5 years
Internal rate of...

The management of Revco Products is exploring five different
investment opportunities. Information on the five projects under
study follows:
Project Number
1
2
3
4
5
Investment required
$
(264,000
)
$
(435,000
)
$
(418,000
)
$
(364,000
)
$
(500,000
)
Present value of cash inflows at a 10%
discount rate
334,640
510,970
398,360
444,600
579,200
Net present value
$
70,640
$
75,970
$
(19,640
)
$
80,600
$
79,200
Life of the project
6 years
3 years...

Exercise 13-5 Preference Ranking [LO13-5]
Information on four investment proposals is given below:
Investment Proposal
A
B
C
D
Investment required
$
(60,000
)
$
(70,000
)
$
(40,000
)
$
(990,000
)
Present value of cash inflows
88,000
97,300
64,200
1,318,700
Net present value
$
28,000
$
27,300
$
24,200
$
328,700
Life of the project
5 years
7 years
6 years
6 years
Required:
1. Compute the project profitability index for each investment
proposal. (Round your answers to...

Oxford Company has limited funds available for investment and
must ration the funds among four competing projects. Selected
information on the four projects follows:
Project
Investment
Required
Net
Present
Value
Life of
the
Project
(years)
Internal
Rate
of Return
(percent)
A
$990,000
$229,400
6
18%
B
$740,000
$104,350
11
13%
C
$690,000
$181,000
6
19%
D
$890,000
$143,420
4
17%
The net present values...

Preference Ranking
Information on four investment proposals is given below:
Investment
Proposal
A
B
C
D
Investment
required
$(85,000)
$(200,000)
$(90,000) $(170,000)
Present value of cash flows
119,000
250,000
135,000
221,000
Net present
value
$34,000
$50,000
$45,000
$51,000
Life of the
project
5 years
7 years 6
years
6 years
Required:
Compute the project profitability index for each investment
proposal.
Rank the proposals in terms of preference.

Oxford Company has limited funds available for investment and
must ration the funds among four competing projects. Selected
information on the four projects follows: Project Investment
Required Net Present Value Life of the Project (years) Internal
Rate of Return A $ 850,000 $ 266,702 7 19 % B $ 745,000 $ 272,603
12 17 % C $ 700,000 $ 271,478 7 21 % D $ 900,000 $ 162,514 3 20 %
The net present values above have been computed using...

Oxford Company has
limited funds available for investment and must ration the funds
among four competing projects. Selected information on the four
projects follows:
Project
Investment
Required
Net
Present
Value
Life of
the
Project
(years)
Internal
Rate
of Return
(percent)
A
$830,000
$240,960
7
18%
B
$660,000
$225,820
12
17%
C
$530,000
$175,860
7
19%
D
$730,000
$165,320
3
22%
The net present values
above have been computed using a 10% discount rate. The company
wants your assistance in determining...

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