The management of Revco Products is exploring four different investment opportun
ID: 2530773 • 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 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.
Required:
1. Compute the project profitability index for each investment project.
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 $ (270,000 ) $ (450,000 ) $ (360,000 ) $ (480,000 ) Present value of cash inflows at a 10% discount rate 336,140 522,970 433,400 567,270 Net present value $ 66,140 $ 72,970 $ 73,400 $ 87,270 Life of the project 6 years 3 years 12 years 6 years Internal rate of return 18 % 19 % 14 % 16 %Explanation / Answer
1 Project profitability index: 1 0.24 =66140/270000 2 0.16 =72970/450000 3 0.20 =73400/360000 4 0.18 =87270/480000 2 Net present value Project profitability index Internal rate of return Project 1 4 1 2 Project 2 3 4 1 Project 3 2 2 4 Project 4 1 3 3
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