Question

Perkins Corporation is considering several investment proposals, as shown below:

		Investment Proposal
	A			B			C			D
Investment required	$	120,000		$	150,000		$	90,000		$	112,500
Present value of future net cash flows	$	144,000		$	225,000		$	126,000		$	240,000

If the project profitability index is used, the ranking of the projects from most to least profitable would be:

Multiple Choice

• D, B, C, A

• B, D, C, A

• B, D, A, C

• A, C, B, D

Answer 1

D, B, C, A

Profitability index	=	Present value of future net cash flows	/	Investment required
So,
Proposal		Present value of future net cash flows	/	Investment required	=	Profitability index	Ranking
A		$                    1,44,000	/	$                1,20,000	=	1.20	IV
B		$                    2,25,000	/	$                1,50,000	=	1.50	II
C		$                    1,26,000	/	$                    90,000	=	1.40	III
D		$                    2,40,000	/	$                1,12,500	=	2.13	I
So, ranking of product from most profitable to lease is:
D, B, C, A