Question

The management of Revco Products is exploring four different investment opportunities. Information on the four projects...

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 $ (570,000 ) $ (500,000 ) $ (370,000 ) $ (340,000 )
Present value of cash inflows at a 11% discount rate 603,219 584,233 385,015 366,546
Net present value $ 33,219 $ 84,233 $ 15,015 $ 26,546
Life of the project 6 years 12 years 6 years 3 years
Internal rate of return 13 % 14 % 12 % 15 %

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.

project profitability index

1

2

3

4

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

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

Net Present Value Project Profitability Index Internal Rate of Return
First preference 2selected answer correct
Second preference 1selected answer correct 2selected answer correct
Third preference 4selected answer correct
Fourth preference 3selected answer correct

Homework Answers

Answer #1

1. Calculating the project profitability index for each investment project.

project profitability index

1
Project profitability index=Net present value /Investment required
Project Profitability index
1 0.058 =33,219/570,000
2 0.16 =84233/500,000
3 0.040 =15,015/370000
4 0.078 =26,546/340000
2
Net Present value Project Profitability index Internal rate of return
First preference 2 2 4
Second preference 3 4 3
Third preference 1 3 2
Fouth preference 4 1 1

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