Austin Company is investigating five different investment opportunities. Information on the four projects under study is given
Question:
Since the companys 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 cant 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:
a. Net present value
b. Project profitability index
c. Internal rate of return
3. Which ranking do you prefer?Why?
Project Number 3 4 Present value of cash inflows at a 10% discount rate. Net present value Life of the project 567,270 $ 87,270 6 years 433.400 336,140 522,970 73,400 S 66,140 72,970 6 years 12 years 1496 3 years 19% Internal rate of return 16% 18%
Step by Step Answer:
1 The formula for the project profitability index is The index for the projects under consideration ...View the full answer
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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