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
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.

Answer 1

Requirement: 1
Oxford Company
Project’s Profitability Index (PI) = 1 + (Net Present value ÷ Initial Investment)
Project	Calculation	Project’s Profitability Index (PI)
	(approx.)
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
Oxford Company
Description	Net Present Value (NPV)	Project’s Profitability Index (PI)	Internal Rate of Return (IRR)
	Projects (in order of Preference)
First Preference	C	C	C
Second Preference	A	B	D
Third Preference	B	A	A
Fourth Preference	D	D	B

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