The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Project Number |
1 | 2 | 3 | 4 | |||||||||
Investment required | $ | (550,000 | ) | $ | (500,000 | ) | $ | (400,000 | ) | $ | (520,000 | ) |
Present value of cash inflows at a 11% discount rate | 617,520 | 664,110 | 463,140 | 628,320 | ||||||||
Net present value | $ | 67,520 | $ | 164,110 | $ | 63,140 | $ | 108,320 | ||||
Life of the project | 8 years | 16 years | 8 years | 5 years | ||||||||
Internal rate of return | 14% | 16% | 15% | 19% | ||||||||
Because the company’s required rate of return is 11%, a 11% discount rate has been used in the present value computations above. Limited funds are available for investment, so the company can’t accept all of the available projects. |
Required: | |
1. |
Compute the project profitability index for each investment project. (Round your answers to 2 decimal places.) |
2. |
Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return. |
Ans 1. Profitability Index = Present Value of Inflows/Present value of outflows
Particulars | Project 1 | Project 2 | Project 3 | Project 4 |
Present Value of Inflows (A) | $617520 | $664110 | $463140 | $628320 |
Present value of outflows (B) | (550000) | (500000) | (400000) | (520000) |
Profitability Index (A/B) | 1.12 | 1.33 | 1.16 | 1.21 |
Ans 2. Rank of projects are as under:-
High profitability index is good for the project
Particulars | Rank |
project 1 | 4 |
project 2 | 1 |
project 3 | 3 |
Project 4 | 2 |
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