The management of Revco Products is exploring four different investment opportun
ID: 2475844 • Letter: T
Question
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Project Number 1 2 3 4
Investment required $ (270,000 ) $ (450,000 ) $ (360,000 ) $ (480,000 )
Present value of cash inflows at a 10% discount rate 336,140 522,970 433,400 567,270
Net present value $ 66,140 $ 72,970 $ 73,400 $ 87,270
Life of the project 6 years 3 years 12 years 6 years
Internal rate of return 18% 19% 14% 16%
Because the company’s required rate of return is 10%, a 10% discount rate has been used in the present value computations above. 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 2 decimal places.)
Explanation / Answer
project profitability index=PV Cash Inflows/Pv of cash outflows
PI of Project 1=$336,140/$270,000=1.245
PI of Project 2=$522,970/$450,000=1.16
PI of Project 1=$433,400/$360,000=1.20
PI of Project 1=$567,270/$480,000=1.18
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