Problem 13-21 Preference Ranking of Investment Projects [LO13-5] The management
ID: 2588139 • Letter: P
Question
Problem 13-21 Preference Ranking of Investment Projects [LO13-5] The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows: Proiect Number Investment required Present value of cash inflows $ (270,000) (450,000) (360,000) (480,000) 567,270 $ 66,140 $ 72,970 73,400 87,270 years 336,140 522.970 433,400 at a 10% discount rate Net present value Life of the project years 3 years 12 years Internal rate of returrn 18% 19% 14% 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 Complete this question by entering your answers in the tabs below. Required1Required 2 Compute the project profitability index for each investment project. (Round your answers to 2 decimal places.) Project Profitability Index 2 4Explanation / Answer
Profitability index formula- Present value of future Cash flow/ initial investment Project no. Present value of future cash flow (A) Initial Investment (B) Profitability index (A/B) 1 336,140 270,000 1.24 2 522,970 450,000 1.16 3 433,400 360,000 1.20 4 567,270 480,000 1.18 Net Present Value Project Profitability index Internal rate of return First preference 4 1 2 Second preference 3 3 1 Third preference 2 4 4 Fourth preference 1 2 3