Austin Company is investigating four different investment opportunities. Informa

Question

Austin Company is investigating four different investment opportunities. Information on the four projects under study is given below: Project Number 1 2 3 4 Investment required $ (600,000 ) $ (550,000 ) $ (400,000 ) $ (520,000 ) Present value of cash inflows at a 8% discount rate 747,110 646,123 660,905 638,880 Net present value $ 147,110 $ 96,123 $ 260,905 $ 118,880 Life of the project 8 years 16 years 8 years 5 years Internal rate of return 14% 11% 23% 16% Because the company’s required rate of return is 8%, a 8% discount rate has been used in the present value computations on the prior page. Limited funds are available for investment, so the company can’t accept all of the available projects. Required: 1. Compute the project profitability index for each investment project. (Round your answers to 3 decimal places.) 2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Explanation / Answer

* Profitability Index = Present value of cash inflows / Initial Investment

Projects 1 2 3 4 A Investment    600,000.00    550,000.00    400,000.00    520,000.00 B Present value of cash inflows    747,110.00    646,123.00    660,905.00    638,880.00 C Net Present value    147,110.00      96,123.00    260,905.00    118,880.00 D Internal rate of Return 14% 11% 23% 16% E Profitability Index*              1.245              1.175              1.652              1.229 F Rank As per Profitability Index II IV I III G Rank As per Net Present value II IV I III H Rank As per Internal rate of return III IV I II

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