The management of Revco Products is exploring five different investment opportunities. Information on the five projects under study follows:
Project Number | |||||||||||||||||||
1 | 2 | 3 | 4 | 5 | |||||||||||||||
Investment required | $ | (264,000 | ) | $ | (435,000 | ) | $ | (418,000 | ) | $ | (364,000 | ) | $ | (500,000 | ) | ||||
Present value of cash inflows at a 10% discount rate |
334,640 | 510,970 | 398,360 | 444,600 | 579,200 | ||||||||||||||
Net present value | $ | 70,640 | $ | 75,970 | $ | (19,640 | ) | $ | 80,600 | $ | 79,200 | ||||||||
Life of the project | 6 years | 3 years | 5 years | 12 years | 6 years | ||||||||||||||
The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the preceding present value computations. Limited funds are available for investment, and so the company cannot accept all of the available projects.
Required:
1. Compute the profitability index for each investment project. (Round your answers to 2 decimal places.)
2. Rank the five projects according to preference, in terms of (a) net present value, (b) profitability index.
3. Which ranking do you prefer?
multiple choice
Net present value
Profitability index
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