Question

In: Accounting

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

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.

Solutions

Expert Solution

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.

ekkarill92 answered 2 years ago
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