Perkins Corporation is considering several investment proposals, as shown below:
| Investment Proposal | ||||||||||||
| A | B | C | D | |||||||||
| Investment required | $ | 104,000 | $ | 130,000 | $ | 78,000 | $ | 97,500 | ||||
| Present value of future net cash flows | $ | 124,800 | $ | 195,000 | $ | 109,200 | $ | 192,000 | ||||
If the project profitability index is used, the ranking of the projects from most to least profitable would be:
Profitability Index = Present value of future net cash flows / Investment required
|
Investment Proposal |
||||
|
A |
B |
C |
D |
|
|
Present value of future net cash flows (a) |
1,24,800 |
1,95,000 |
1,09,200 |
1,92,000 |
|
Investment required (b) |
1,04,000 |
1,30,000 |
78,000 |
97,500 |
|
Profitability Index (a) / (b) |
1.20 |
1.50 |
1.40 |
1.97 |
|
Ranking based on Profitability Index |
4 |
2 |
3 |
1 |
The ranking of the projects from most to least profitable would be “D, B, C, A”
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