Question

Jill Harrington, a manager at Jennings Company, is considering several potential capital investment projects. Data on these projects follow:

	Project X		Project Y		Project Z
Initial investment		$40,000		$20,000		$50,000
Annual cash inflows		25,000		10,000		25,400
PV of cash inflows		45,000		33,000		70,000

  
Required:
1. Compute the payback period for each project and rank order them based on this criterion. (Round your answers to 2 decimal places.)

	Payback Period	Rank
Project X
Project Y
Project Z

2. Compute the NPV of each project and rank order them based on this criterion.

	NPV	Rank
Project X
Project Y
Project Z

3. Compute the profitability index of each project and rank order them based on this criterion. (Round your answers to 2 decimal places.)

	PI	Rank
Project X
Project Y
Project Z

If Jennings has limited funds to invest, which ranking should Jill recommend?

	NPV Ranking
	Profitability Index Ranking
	Payback Ranking

Answer 1

1. Payback period for each project and rank order them based on this criterion is as shown below:

	Payback Period		Rank
Project X	40,000/25,000	1.60	1
Project Y	20,000/10,000	2.00	3
Project Z	50,000/25,400	1.97	2

2. NPV of each project and rank order them based on this criterion is

	NPV		Rank
Project X	45,000-40,000	5000	3
Project Y	33,000-20,000	13000	2
Project Z	70,000-50,000	20000	1

3. profitability index of each project and rank order them based on this criterion is

	PI		Rank
Project X	40,000/5,000	8.00	1
Project Y	20,000/13,000	1.54	3
Project Z	50,000/20,000	2.50	2

Jill would recommend payback ranking