Jill Harrington, a manager at Jennings Company, is considering several potential capital investment projects. Data on these projects follow: Project X Project Y Project Z Initial investment $40,000 $20,000 $50,000 Annual cash inflows 25,000 10,000 25,400 PV of cash inflows 45,000 33,000 70,000 Required: 1. Compute the payback period for each project and rank order them based on this criterion. (Round your answers to 2 decimal places.) 2. Compute the NPV of each project and rank order them based on this criterion. 3. Compute the profitability index of each project and rank order them based on this criterion. (Round your answers to 2 decimal places.) 4. If Jennings has limited funds to invest, which ranking should Jill recommend? Payback Ranking NPV Ranking Profitability Index Ranking
1. payback period is the number of years in which the initial investment of a project is recovered.
Payback period = Investment / Annaul cash flows
Project X = $40000/25000 = 1.6 years
Project Y = $20000/10000 = 2 Years
Project Z = $50000/25400 = 1.97 years
2. NPV = Present value of cash inflows - cash outflows
Project X = $45000 - 25000 = $20000
Project Y = $33000 - 10000 = $23000
Project Z = $70000 - 25400 = $44600
3. Profitability index = Present value of cash inflows / cash outflows.
Project X = $45000 / 25000 = 1.8
Project Y = $33000 / 10000 = 3.3
Project Z = $70000 / 25400 = 2.76
4. The ranking is as below:
Payback period | NPV | Profitabiltiy Index | |
Project X | 1 | 3 | 2 |
Project Y | 3 | 2 | 1 |
Project Z | 2 | 1 | 3 |
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