Perkins Corporation is considering several investment proposals, as shown below: Investment Proposal A B C D...

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

Expert Solution

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

ekkarill92 answered 1 year ago

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