The management of Revco Products is exploring four different investment opportun
ID: 2496693 • Letter: T
Question
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Project Number
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.
Compute the project profitability index for each investment project. (Round your answers to 2 decimal places.)
Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Explanation / Answer
1. Computation of the project profitability index :
Profitability Index = 1+( Net present Value/ Initial Investment Required)
1 2 3 4
Net Present Value ($) 115,480 86,754 90,232 117,200
Initial investment 420,000 370,000 270,000 390,000
Required($)
Project Profitability Index 1.27 1.23 1.33 1.30
2. Ranking of Projects
i. In terms of Net Present value
1 2 3 4
Net Present Value ($) 115,480 86,754 90,232 117,200
Ranking II IV III I
ii. In terms of Project profitability Index
1 2 3 4
Project Profitability Index 1.27 1.23 1.33 1.30
Ranking III IV I II
iii. In terms of Internal rate of return
1 2 3 4
Internal rate of return 18% 14% 20% 23%
Raning III IV II I
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