3 1.00 points Oxford Company has limited funds available for investment and must

Question

3 1.00 points Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows Internal Rate Life of Net Present Value S332,950 $199,300 S201,805 S216,100 Project of Return (years) (percent) Project Required $930,000 $710,000 $630,000 $830,000 21% 16% 20% 6 6 4 The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth. Required 1. Compute the project profitability index for each project. (Round your answers to 2 decimal places.) Profitability Project Index 2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return. Project Net Present Profitability of Return Internal Rate Value Index First preference Second preference Third preference Fourth preference

Explanation / Answer

1. Compute the project profitability Index for each project.

Profitability Index = (Initial Investment + Net Present Value) / Investment Required

A = ($930,000 + $332,950) / $930,000 = 1.36

B = ($710,000 + $199,300) / $710,000 = 1.28

C = ($630,000 + $201,805) / $630,000 = 1.32

D = ($830,000 + $216,100) / $830,000 = 1.26

2. In order of preference, rank the four projects in terms of net present value, profitability index and internal rate of return.

NPV higher the better, Profitability Index higher the better, Internal Rate of Return higher the better.

Project Profitability Index A 1.36 B 1.28 C 1.32 D 1.26

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