Veer Corporation is considering three investment projects: K, L, and M. Project

Question

Veer Corporation is considering three investment projects: K, L, and M. Project K would require an investment of $27,000, Project L of $59,000, and Project M of $88,000. No other cash outflows would be involved. The present value of the cash inflow would be $31,860 for [roject K, $66080 for Project L, and $95,040 for Project M. Compute the NPV for Project L Rank the project according to the Net Present Value from most profitable(1) to least profitable(3). Compute the project prfitability for K. Give answer in decimal form. Compute the project profability for L. Give answer in decimal form. Rank Veer's investments by Project profitability index from most to least desirable. from most DESIRABLE(1) to least desirable(3).

Explanation / Answer

NPV of a project is calculated using the formula

NPV = Present value of future cash flows – Initial investment

For Project L, Present Value of cash flows = $66,080. Initial Investment = $59,000

Hence NPV of Project L = $66,080 - $59,000 = $7,080

NPV of Project K = Present Value of cash flows – Initial Investment = $31,860 - $27,000 = $4,860

NPV of Project M = Present Value of cash flows – Initial Investment = $95,040 - $88,000 = $7,040

Ranking will be as follows

Rank 1 – NPV of Project L - $7,080

Rank 2 – NPV of Project M - $7,040

Rank 3 – NPV of Project K - $4,860

Project Profitability is calculated using the formula,

1 + (Net Present Value/Initial Investment)

Project Profitability of Project K = 1 + ($4,860/$27,000) = 1+0.18 = 1.18

Project Profitability of Project L = 1 + ($7,080/$59,000) = 1+0.12 = 1.12

Project Profitability of Project M = 1 + ($7,040/$88,000) = 1+0.08 = 1.08

Desirability of the projects based upon Profitability Index is as follows:

Desirable 1 – Profitability Index of Project K – 1.18

Desirable 2 – Profitability Index of Project L – 1.12

Desirable 3 – Profitability Index of Project M – 1.08

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