Question

Shaylee Corp has $2.25 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows:

	Project A		Project B		Project C		Project D
Initial investment	$	590,000	$	270,000	$	830,000	$	985,000
Present value of future cash flows		805,000		435,000		1,240,000		1,600,000

  
Required:
1. Is Shaylee able to invest in all of these projects simultaneously?

	No
	Yes

  

2-a. Calculate the profitability index for each project. (Round your answers to 4 decimal places.)



2-b. What is Shaylee's order of preference based on the profitability index?

Answer 1

Req 1.
Total Investment requird for all Projects:
Project A		590000
Project B		270000
Project C		830000
Project D		985000
Total Investment required		2675000
Total investment required is $ 2.675 mllion and investment in hand is $ 2.25 million, hence the company cannot invest in all projects.
Req 2:
			A	B	C	D
Present value of Cash flows			805000	435000	1240000	1600000
Divide: Initial Investment			590000	270000	830000	985000
Profitability Index			1.36	1.61	1.49	1.62
(Present value of inflows/ Initial Investment)
Req 2-b:
Preference order		Project
First		Project D
Second		Project B
Third		Project C
Fourth		Project A