The management of Revco Products is exploring four different investment opportun
ID: 2526811 • Letter: T
Question
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Because the company’s required rate of return is 9%, a 9% 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.)
2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.
Project Number 1 2 3 4 Investment required $ (630,000 ) $ (580,000 ) $ (430,000 ) $ (550,000 ) Present value of cash inflows at a 9% discount rate 672,900 665,973 538,320 708,680 Net present value $ 42,900 $ 85,973 $ 108,320 $ 158,680 Life of the project 6 years 12 years 6 years 3 years Internal rate of return 11 % 12 % 17 % 25 %Explanation / Answer
1 Project profitability index: Project 1 0.07 =42900/630000 Project 2 0.15 =85973/580000 Project 3 0.25 =108320/430000 Project 4 0.29 =158680/550000 2 Net present value Project profitability index Internal rate of return Project 1 4 4 4 Project 2 3 3 3 Project 3 2 2 2 Project 4 1 1 1
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