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: before of the project 8 years 16 years 8 years 5 years Internal rate of return 14% 16% 15% 19% Because the company's required rate of return is 11 %, a 11 % 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: Compute the project profitability index for each investment project. (Round your answers to 3 decimal places.) 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/Present value of cash outflows

Project 1

1)=617520/550000=1.12

2)=664110/500000=1.32

3)=463140/400000=1.15

4)=628320/520000=1.20

2

Ranking in terms of Preference

NPV

Rank 1   Project 2

Rank 2   Project 4

Rank 3   Project 1

Rank 4   Project 3

IRR

Rank 1     Project     4

Rank 2         Project 2

Rank 3          Project 3

Rank 4         Project 1

PI

Rank 1     Project         2

Rank 2      Project          3

Rank 3        Project        4

Rank 4          Project      1

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