Information on four investment proposals is given below: Investment reqquired Pr

Question

Information on four investment proposals is given below: Investment reqquired Present value of cash inflows Net present value Life of the project Investment Proposal $ (790,000) $ (120,000) $(120,000) $(1,820,000) 1,121,300 168,300 182,000 2,427,200 $ 331,300 48,30062,000 607,200 years7years6 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

Calculation of profitability index: Profitability index= Present value of cash inflows/ initial investment A= 1121300/790000=1.42 (Rank 2) B=168300/120000=1.40 (Rank 3) C=182000/120000=1.52(Ramk 1) D=2427200/1820000=1.33 (Rank 4)

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