he management of Revco Products is exploring four different investment opportuni
ID: 2498041 • Letter: H
Question
he 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 8%, a 8% 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.
he management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Explanation / Answer
The project profitability index for each investment project are as follows:
Profitability Index= Present Value of Future Cash Flows/Initial Investment Required
= 1 + Net Present Value/Initial Investment Required
Profitability IndexP1= 1+$147,110 / $600,000 = 1.245
Profitability IndexP2= 1+$96,123 / $550,000 = 1.175
Profitability IndexP3= 1+$260,905 / $400,000 = 1.652
Profitability IndexP4= 1+$118,880 / $520,000 = 1.232
AS THE FUND IS LIMITED AND PROFITABILITY INDEX OF PROJECT 3 IS HIGHER OF ALL PROJECTS AND IRR IS 23% WELL ABOVE THE REQUIRED RATE OF RETURN i.e. 8%, SO REVCO PRODUCTS MUST CHOOSE PROJECT 3.
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