Question

Monty Inc. is comparing several alternative capital budgeting projects as shown below:

	Projects
	A	B	C
Initial investment	$82000	$122000	$162000
Present value of net cash flows	92000	112000	202000

Using the profitability index, the projects rank as

C, A, B.

A, C, B.

C, B, A.

A, B, C.

Answer 1

Answer: C, A, B

Explanation

1. Computation of the project profitability index for each investment proposal.
	A	B	C
Present value of net cash flows	92,000.00	112,000.00	202,000.00
Initial Investment	82,000.00	122,000.00	162,000.00
Project Profitability Index	112.20%	91.80%	124.69%
(Net Present Value / Initial Investment)
2. Ranking the proposals in terms of preference:
	A	B	C
Rank	2	3	1
Explanation
Proposal C has the highest project profitability index , hence it ranks first.