Question

Oxford Company has limited funds available for investment and must ration the funds among four competing...

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 which project to accept first, second, and so forth.

Required:

1. Compute the project profitability index for each project. (Round your answers to 2 decimal places.)

2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.

Homework Answers

Answer #1
1
Project profitability index = Net Present Value /Investment Required
Project Project profitability index
A 0.29 =240960/830000
B 0.34 =225820/660000
C 0.33 =175860/530000
D 0.23 =165320/730000
2
Net present value Project profitability index Internal rate of return
First Preference A B D
Second Preference B C C
Third Preference C A A
Fourth Preference D D B
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