Question

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows: Project Number $(270,000) 5(450, eee) 5(360,000) $(480,000) Investment required Present value of cash inflows at a lex discount rate Net present value Life of the project Internal rate of return $ 336,140 66,140 6 years 522,970 $ 72,970 3 years 433,480 $ 73,400 12 years 145% $ 567,270 87,270 6 years 16% Because the company's required rate of return is 10%, a 10% 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 2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Answer 1

Profitability of Index = Net present Value / Investment Required Calculation of Profitability Index 1 2 3 Investment Required 2700000 450000 360000 480000 Net Present Value 66140 72970 73400 872701 Profitablility index: 0.244963 0.162156 0.203889 0.181813 (Net present value / Investment) Investmnet Proposal Answers Project PI 0.24 OR 1.24 0.16 OR 1.16 0.20 OR 1.20 0.18 OR 1.18 Net Present Profitability Internal Rate Value index of return 3 First Preference Second Preference Third Preference Fourth Preference Net Present Value Profitability index Internal Rate of return Criteria for Ranking Highest to Lowest Highest to Lowest Highest to Lowest