Question

9

Perkins Corporation is considering several investment proposals, as shown below:

		Investment Proposal
	A			B			C			D
Investment required	$	96,000		$	120,000		$	72,000		$	90,000
Present value of future net cash flows	$	115,200		$	180,000		$	100,800		$	168,000

If the project profitability index is used, the ranking of the projects from most to least profitable would be:

16

oetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):

Investment required in equipment	$	40,000
Annual cash inflows	$	10,000
Salvage value of equipment	$	0
Life of the investment		15	years
Required rate of return		10	%

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.

The internal rate of return of the investment is closest to:

Answer 1

9)

D,B,C,A

Profitability index = present value of future net cash flows / investment required

A = 115,200/96,000

= 1.2

B = 180,000/120,000

= 1.5

C = 100,800/72,000

= 1.4

D = 168,000/90000

= 1.87

16)

Annual cash inflows	10,000
Less: Depreciation	2,667	=40000/15
Annual net income	7,333
Annual net income	7,333
Divide by Investment	40,000
Simple rate of return	18.3%