Question

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:

  

Project	Investment Required	Net Present Value	Life of the Project (years)	Internal Rate of Return (percent)
A	$860,000	$420,400	8	22%
B	$750,000	$244,420	13	16%
C	$710,000	$367,670	8	23%
D	$910,000	$231,200	4	21%

  

The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

  

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

        

2.	In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.

     

Answer 1

1)	Since,	NPV	=	PV of Inflow - Investment
	Therefore,	PV of Inflow	=	NPV + Investment
	Profitability Index		=	PV of Inflow / Investment
		(a)	(b)	(a+b = c)	(c / a)
	Projects	Investment	NPV	PV of Inflow	Prof. Index
	A	$ 8,60,000.00	$ 4,20,400.00	$ 12,80,400.00	1.49
	B	$ 7,50,000.00	$ 2,44,420.00	$   9,94,420.00	1.33
	C	$ 7,10,000.00	$ 3,67,670.00	$ 10,77,670.00	1.52
	D	$ 9,10,000.00	$ 2,31,200.00	$ 11,41,200.00	1.25

2)	Ranking
			A	B	C	D
	Net Present Value		2	3	4	1
	Profitability Index		2	3	1	4
	Internal Rate of Return		2	4	1	3