Information on four investment proposals is given below Investment Proposal $(17

Question

Information on four investment proposals is given below Investment Proposal $(179,000) (85,700) $(202,000) $(97,000) 121,700 255,000 143,000 Investment required Present value of cash inflows Net present value Life of the project 233,000 46,000 S 54,000 7 years 7 years 6 years 6 yeas $ 36,000 53,000 Required: 1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) Project Profitability Index Proposal 2. Rank the proposals in terms of preference. O BCAD O CADB O DCBA OABC

Explanation / Answer

Profitability Index= Present Value of Future benefits/Initial Investment.

Hence, Profitability Index of Investment A = 121700/85700

= 1.42

Profitability Index of Investment B = 255000/202000

= 1.26

Profitability index of Investment C = 143000/97000

= 1.47

Profitability Index of Investment D = 233000/179000

= 1.3

Hence, the ranking order will be as follows: C A D B

Hence Option B is correct answer.

Alternatively profitability Index can be calculated as follows

Profitability Index= (Net Present Value+ Initial Investment)/ Initial investment

Any of the above formulas will give the same answer.

For Example, Profitability index of Investment A as per Second Fromula can be calculated as follows:

Profitability Index of investment A = (36000+85700)/85700

= 1.42 ( Which is same as the answer we got using the first formula)

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