Question

Information on four investment proposals is given below:

		Investment Proposal
	A			B			C			D
Investment required	$	(150,000	)	$	(200,000	)	$	(180,000	)	$	(2,600,000	)
Present value of cash inflows		211,500			275,600			274,100			3,470,500
Net present value	$	61,500		$	75,600		$	94,100		$	870,500
Life of the project		5 years			7 years			6 years			6 years

Required:

1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.)

2. Rank the proposals in terms of preference.

Answer 1

Solution 1:

Computation of Profitability Index and ranking of Project
Particulars	A	B	C	D
Investment required	$1,50,000	$2,00,000	$1,80,000	$26,00,000
Net Present Value	$61,500	$75,600	$94,100	$8,70,500
Profitability Index (NPV / Investment required)	0.41	0.38	0.52	0.33
Ranking Preference	Second	Third	First	Fourth

Solution 2:

First	Project C
second	Project A
third	Project B
fourth	Project D