Problem 13-21 Preference Ranking of Investment Projects [L013-5) The management
ID: 2598432 • Letter: P
Question
Problem 13-21 Preference Ranking of Investment Projects [L013-5) The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows Project Number 4 Investment required Present value of cash inflows at a $ (270,000) 450,000) (360,000) (480,000) 522,970 $ 66,140 $ 72,970 3 years 336,140 433,400 10% discount rate Net present value Life of the project 567,270 73,400 $ 87,270 6 years 6 years 12 years Internal rate of return 18% 19% 14% 168 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.Explanation / Answer
1. Profitablity Index = 1+Net Present Value/Initial Investment
Accept a project if the profitability index is greater than 1
Project Profitablity Index 1 1+66140/270000 = 1.24 2 1+72970/450000 = 1.16 3 1+73400/360000 = 1.20 4 1+87270/480000 = 1.18