Question

Shaylee Corp has $2.00 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	$	431,000	$	246,000	$	736,000	$	961,000
Present value of future cash flows		781,000		431,000		1,216,000		1,576,000

  

Required:

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

2-A. Calculate the profitability index for each project.

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

Profitability Index Rank 1-4

Project A

Project B

Project C

Project D

Answer 1

S.No.	Particulars	Project A	Project B	Project C	Project D
1	Intial Investments	431000	246000	736000	961000
2	Less: PV of future cashflow inflow	781000	431000	1216000	1576000
3	Net Cash Flow	350000	185000	480000	615000
4	Profitability Index= PV of cashflow/ IntialOutlay (2/1)	1.81	1.75	1.65	1.64
	Rank on the basis of Net Cash Flow	III	IV	II	I
	Rank on the basis of PI	I	II	III	IV
Ans1	Amount avilable for investment is $ 2,000,000/-
	On the basis of Out Flow Shalyee can invest in Project D and C only
	On the basis of PI can invest in Project Project A, B and C only