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.

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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