Question

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	$	(450,000	)	$	(540,000	)	$	(390,000	)	$	(340,000	)
Present value of cash inflows at a 8% discount rate		549,775			715,947			416,102			399,353
Net present value	$	99,775		$	175,947		$	26,102		$	59,353
Life of the project		6 years			12 years			6 years			3 years
Internal rate of return		15	%		14	%		10	%		17	%

Because the company’s required rate of return is 8%, a 8% 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.

2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Answer 1

Answer:-1)-

Calulation of Project Profitablity Index
Particulars	Project Number
	1	2	3	4
Net Present Value $ (A)	99775	175947	26102	59353
Investment required $ (B)	450000	540000	390000	340000
Profitablity Index C=A/B	0.22	0.33	0.07	0.17
Ranking	2	1	4	3

2)-

Statment of Ranking
Particulars	Project Number
	1	2	3	4
Net Present Value $	99775	175947	26102	59353
Ranking	2	1	4	3
Profitablity Index	0.22	0.33	0.07	0.17
Ranking	2	1	4	3
Internal rate of return	15%	14%	10%	17%
Ranking	2	3	4	1