Information on four investment proposals is given below: Investment Proposal Inv

Question

Information on four investment proposals is given below: Investment Proposal Investment required Present value of cash inflows Net present value Life of the project $ (900,000) $(170,000) $(90,000) $(1,430,000) 1,908,300 $ 363,600 $ 63,400 $46,500 $478,300 6 years 1,263,600 233,400 136, 500 5 years 7 years 6 years Required 1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference Project Investment Profitability Preference Rank Proposal Index

Explanation / Answer

1. Profitability Index = Present Value of Future Cash Flows / Initial Investment Required
A = $1,263,600 / 900,000 = 1.40
B = $233,400 / 170,000 = 1.37
C = $136,500 / 90,000 = 1.52
D = $1,908,300 / 1,430,000 = 1.33

2.

      

Investment Proposal Project Profitability Index Rank Preference A 1.40 II B 1.37 III C 1.52 I D 1,33 IV

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