Question

E12-35A (similar to) Question Help The following table contains information about four projects in which Hughes Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about their potential project. (Click the icon to view the projects information.) Requirements 1. Rank the four projects in order of preference by using the a. net present value. b. project profitability index c. internal rate of return. d. payback period. e. accounting rate of return. 2. Which method(s) do you think is best for evaluating capital investment projects in general? Why? Requirement 1. Rank the projects in order of preference. Data Table (a) Net Present Value 1st preferred 2nd preferred 3rd preferred 4th preferred Internal Rate Profitability of Return Index Investment Net Present Project Required Value A...... $ 210.000 $ 37,176 B...... $ 420,000 $ 25,684 ........$ 1,025,000 $ 133,942 D.........$ 1,510,000 $ 59,150 Life of Project 5 6 3 4 Payback Period in Years 2.92 3.13 1.18 Accounting Rate of Return 19% 14 % 1.06 0 2.20 1.13 1.04 12% 3.05 22 % Print Done Choose from any drop-down list and then click Check Answer.

Answer 1

1.
a. Net Present Value
Ranking is made on basis of highest Net Present Value

Rank	Project
1	C
2	D
3	A
4	B

b. Profitability Index
Ranking is made on basis of highest Profitability Index

Rank	Project
1	A
2	C
3	B
4	D

c. Internal Rate of Return
Ranking is made on basis of highest Internal Rate of Return

Rank	Project
1	B
2	A
3	C
4	D

d. Payback period
Ranking is made on basis of lowest payback period

Rank	Project
1	C
2	A
3	D
4	B

e. Accounting rate of return
Ranking is made on basis of highest Accounting Rate of Return

Rank	Project
1	D
2	A
3	B
4	C

2.
Profitability Index method is best for evaluating projects since it gives PV of cash follows over investment in per dollar value. Since different projects have different life and different investment value, therefore Profitability index will give fair idea about which project gives highest return.