Question

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 a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth. Required: 1. Compute the project profitability index for each project. 2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.

Answer 1

1.

	Project
	A	B	C	D
Net present value (a)	266702	272603	271478	162514
Investment required (b)	850000	745000	700000	900000
Project profitability index (c) = (a)/(b)	0.31	0.37	0.39	0.18

The project profitability index has been rounded off to 2 decimal places in the absence of specific instructions regarding the same. Kindly round off as required.

2.

	Net Present Value	Project Profitability Index	Internal Rate of Return
First preference	B	C	C
Second preference	C	B	D
Third preference	A	A	A
Fourth preference	D	D	B