Question

erkins Corporation is considering several investment proposals, as shown below:

		Investment Proposal
	A			B			C			D
Investment required	$	140,000		$	175,000		$	105,000		$	131,250
Present value of future net cash flows	$	168,000		$	262,500		$	147,000		$	300,000

If the project profitability index is used, the ranking of the projects from most to least profitable would be:

Answer 1

Profitability Index = Present value of future net cash flows / Investment Required

	A	B	C	D
Investment required	$       1,40,000	$       1,75,000	$   1,05,000	$ 1,31,250
Present value of future net cash flows	$       1,68,000	$       2,62,500	$   1,47,000	$ 3,00,000
Profitability Index	1.2	1.5	1.4	2.29

Rank 1 = Project D
Rank 2 = Project B
Rank 3 = Project C
Rank 1 = Project A