A company has five independent project proposals and its management has provided

Question

A company has five independent project proposals and its management has provided you with the following information. Project 1, 2,3,4, and 5 respectively here are the data : required investment 500 project 1, 1,000,000 project 2, 750,000 project 3,and 1,500,000 project 4, and 900,000 for project 5 total of 4,650,000. NPV at the appropriate cost of Capital 40,000 and 55,000 and 25,000 and 33,000 and 65,000 respectively.t The budget available is P 4,500,000. Assume that the [rojects are not divisible. a)What is profitability index of project 2___.B) What is profitability index of project 4_____.C) Which project ranked first?_____D)What is the optimal combination of projects?_____

Explanation / Answer

Assuming there is a typo in the question where required investment of Project 1 is given as 500 instead of 500000..COnsidering investment as 500000 and doing all the calculations below:

NPV of Project 1: 40000

NPV of Project 2: 55000

NPV of Project 3: 25000

NPV of Project 4: 33000

NPV of Project 4: 65000

We know, Profitability Index, PI=1+NPV/Initial Investment

Hence,

PI of Project 1:=1+40000/500000=1.08

PI of Project 2:=1+55000/1000000=1.055

PI of Project 3: =1+25000/750000=1.033

PI of Project 4: =1+33000/1500000=1.022

PI of Project 5: =1+65000/900000=1.072

Hence, the higher the PI the better the project so we would rank 1st project the highest

We are having budget of 4500000 hence we would choose 1,5,2,3

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