Question

A company is considering the following investment projects. (Ignore income taxes):

	Project Q			Project R			Project S
Investment required	$	42,800		$	80,800		$	142,000
Present value of cash inflows	$	46,108		$	92,768		$	156,260

The only cash outflows are the initial investments in the projects.

Required:

1. Rank the investment projects using the project profitability index.
1st_____
2nd______
3rd______

Larson, Inc. has received a request for a special order of 9,100 units of product A276 for $46.00 each. The normal unit product cost of product A276 is as follows:

Direct materials	$	16.80
Direct labor		6.10
Variable manufacturing overhead		3.30
Fixed manufacturing overhead		6.20
Unit product cost	$	32.40

The normal selling price of A276 is $51.10 each, but the units would need to be modified slightly for the customer.

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product A276 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $45,500 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

2. Determine the effect on the company's total net operating income of accepting the special order.

Increase/decrease _________________

Answer 1

answer 1)

PI = present value cash inflows /investment required

answer 2)