Yancey Company has limited funds available for investment and must ration the fu

Question

Yancey Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:

Project Investment
Required Net
Present
Value Life of
the
Project
(years) Internal
Rate
of Return
A $950,000 $330,400 8 19%
B $720,000 $203,390 13 15%
C $650,000 $363,650 8 24%
D $850,000 $259,500 4 23%

The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, which to accept second, and so forth. The company

Explanation / Answer

Profitability Index (PI) = Present Value of cash Flows/Initial Investment Present value = Net Present Value + Initial investment PI = 1 + (NPV/Initial Investment_ A. PI = 1 + (330400/950000) = 1.34778947 B. PI = 1 + (203390/720000) = 1.28248611 C. PI = 1 + (363650/650000) = 1.55946154 D. PI = 1 + (259500/850000) = 1.30529412 Q2) We should choose projects with highest Profitability Index first over the projects and then look at IRR and then NPV. By NPV order is C, A, D, B By PI order is C, A, D, B By IRR order if C, D, A, B

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