Oxford Company has limited funds available for investment and must ration the fu

Question

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows Life of Internal the Rate Investment Present Project of Returm Project Required Value (years) (percent) $890, 000 459, 687 $690, 000 227, 448 13 $590, 000 279, 681 $790, 000 159, 067 23% 16% 22% 19% 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. 2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return. Complete this question by entering your answers in the tabs below Required 1 Required 2 Compute the project profitability index for each project. (Round your answers to 2 decimal places.) Project Project Profitability Index

Explanation / Answer

Project Project Profitabiility index

A 1.52   

B 1.33

C 1.47

D 1.20

In otherwords we can write Profitability Index as

A - 0.52

B - 0.33

C - 0.47

D - 0.20

Profitability Index = Present Value of Future Cash Flows / Initial Investment

or

(NPV + Initial Investment ) / Initial Investment

Project A : ($ 459687 + $890,000) / $890,000 = 1.52

Project B : ($227,448 + $690,000) / $690,000 = 1.33

Project C : ($279,681 + $590,000) / $590,000 = 1.47

Project D : ($159,067 + $790,000) / $790,000 = 1.20

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