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 |
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A | $ | 970,000 | $ | 176,514 | 6 | 16 | % | |
B | $ | 730,000 | $ | 175,933 | 11 | 15 | % | |
C | $ | 670,000 | $ | 185,782 | 6 | 19 | % | |
D | $ | 830,000 | $ | 129,082 | 4 | 17 | % | |
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.
2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.
Requirement: 1 |
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Oxford Company |
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Project’s Profitability Index (PI) = 1 + (Net Present value ÷ Initial Investment) |
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Project |
Calculation |
Project’s Profitability Index (PI) |
(approx.) |
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A |
1 + (176,514 ÷ 970,000) |
1.18 |
B |
1 + (175,933 ÷ 730,000) |
1.24 |
C |
1 + (185,782 ÷ 670,000) |
1.27 |
D |
1 + (129,082 ÷ 830,000) |
1.15 |
Requirement: 2 |
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Oxford Company |
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Description |
Net Present Value (NPV) |
Project’s Profitability Index (PI) |
Internal Rate of Return (IRR) |
Projects (in order of Preference) |
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First Preference |
C |
C |
C |
Second Preference |
A |
B |
D |
Third Preference |
B |
A |
A |
Fourth Preference |
D |
D |
B |
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