Question

Janesville Company is investigating four different investment opportunities. Information on the four projects under study is given below:

Project Number

	1			2			3			4
Investment required	$	(450,000	)	$	(540,000	)	$	(390,000	)	$	(420,000	)
Present value of cash inflows at a 8% discount rate		624,720			618,300			624,720			496,800
Net present value	$	174,720		$	78,300		$	234,720		$	76,800
Life of the project		7 years			14 years			7 years			4 years
Internal rate of return		19%			10%			24%			16%

Because the company’s required rate of return is 8%, a 8% discount rate has been used in the present value computations above. Limited funds are available for investment, so the company can’t accept all of the available projects.

Required:
1.		Compute the project profitability index for each investment project. (Round your answers to 3 decimal places.)
	Project Profitability Index 1 2 3 4

2.		Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.
	Net Present Value Project Profitability Index Internal Rate of Return First preference Second preference Third preference Fourth preference

Answer 1

Solution 1:

Computation of Profitability Index
Particulars	1	2	3	4
Investment required	$4,50,000	$5,40,000	$3,90,000	$4,20,000
PV of cash inflows	$6,24,720	$6,18,300	$6,24,720	$4,96,800
Profitability Index	1.39	1.15	1.60	1.18

Solution 2:

	Net Present Value	Project profitability Index	Internal Rate of return
First Preference	3	3	3
Second Preference	1	1	1
Third Preference	2	4	4
Fourth Preference	4	2	2