The management of Revco Products is exploring four different investment opportun

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 11%, a 11% 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.

    

Project Number

Explanation / Answer

Ans 1. Profitability Index = Present Value of Inflows/Present value of outflows

Ans 2. Rank of projects are as under:-

High profitability index is good for the project

Particulars Project 1 Project 2 Project 3 Project 4 Present Value of Inflows (A) $617520 $664110 $463140 $628320 Present value of outflows (B) (550000) (500000) (400000) (520000) Profitability Index (A/B) 1.12 1.33 1.16 1.21

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