roblem 11-17A Preference Ranking of Investment Projects [LO11-3 The management o

Question

roblem 11-17A Preference Ranking of Investment Projects [LO11-3 The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows Project Number 480,000) $(430,000) $(200,000) S(470,000) 47,680 497,100 251,020 607,400 Investment required Present value of cash inflows at a 12% discount rate Net present value $ 67,680 67,100 51,020 $137,400 Life of the project Internal rate of return 7 years 16% 14 years 15% 7 years 20% 4 years 25% Because the company's required rate of return s 12%, a 12% 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.) Project present 2 Rank the four projects according to preference, in torms of not and internal rate of return ch

Explanation / Answer

1 Formula Profitability Index = PV of cash inflows / Initial investment Project Number 1 2 3 4 PV of cash flows           547,680           497,100          251,020          607,400 Initial Investment           480,000           430,000          200,000          470,000 Profitability Index 1.14 1.16 1.26 1.29 2 Net present value Project Profitability Index Internal Rate of Return First Preference Project No. 4 Project No. 4 Project No. 4 Second Prefence Project No. 1 Project No. 3 Project No. 3 Third Preference Project No. 2 Project No. 2 Project No. 1 Fourth Preference Project No. 3 Project No. 1 Project No. 2

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