Problem 13-21 Preference Ranking of Investment Projects [L013-5] The management

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) 433,400 73,400 12 years 567,270 87,270 6 years 336,140 10% discount rate Net present value Life of the project 522,970 $ 66,140 $ 72,970 3 years 6 years Internal rate of return 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

Explanation / Answer

Profitablity index = 1 + (npv/initial investment)

so for proj 1 = 1 + (66140/270000) = 1.24

proj 2 = 1 + (72970/450000) = 1.16

proj 3 = 1 + (73400/360000) = 1.20

proj 4 = 1 + (87270/480000) = 1.18

Ranking as per NPV

4 > 3 > 2 > 1

Ranking as per IRR

2 > 1 > 4 > 3

Ranking as per Profitability index

1 > 3 > 4 > 2

Above rankings have been done starting with the most preferred project and following with less preferred ones

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---