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

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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