Question

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:

  

Project Number

	1			2			3			4
Investment required	$	(460,000	)	$	(410,000	)	$	(310,000	)	$	(430,000	)
Present value of cash inflows at a 12% discount rate		534,420			496,925			385,970			546,480
Net present value	$	74,420		$	86,925		$	75,970		$	116,480
Life of the project		11 years			22 years			11 years			8 years
Internal rate of return		16%			15%			17%			19%

  

Because the company’s required rate of return is 12%, a 12% 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. (Round your answers to 2 decimal places.)

        

2.	Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

     

Answer 1