How would you rank the following investment proposals using profitability index method? Project Alpha (A): Requires...

How would you rank the following investment proposals using profitability index method?

Project Alpha (A): Requires investment of RM80,000, and has present value of future cash inflows of RM96,000;

Project Beta (B): Requires investment of RM75,000 and has present value of future cash inflows of RM120,000;

Project Gamma (G): Requires investment of RM100,000, and has present value of future cash inflows of RM150,000.

Expert Solution

	Project-Alpha	Project-Beta	Project-Gamma
Investment	80,000	75,000	100,000
PV of future cashinflow	96,000	120,000	150,000

Profitiability index= PV of future cashinflow/investment
Profitiability index=	=96000/80000	=120000/75000	=150000/100000
Profitiability index=	1.20	1.60	1.50

This index represents that every investment of '1' will provide benefit of '1.2', '1.6', '1.50' respectively so ranking will be

Rank 1	Project-Beta	1.60
Rank 2	Project-Gamma	1.50
Rank 3	Project-Alpha	1.20

jeff jeffy answered 1 year ago

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