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 (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.

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