Preference Ranking of Investment Projects [LO4]

Austin Company is investigating four different investment opportunities. Information on the four projects under study is given below:

Project Number 1 2 3 4 Investment required . . . . . . . $(480,000) $(360,000) $(270,000) $(450,000)

Present value of cash infl ows at a 10%

discount rate . . . . . . . . . . . 567,270 433,400 336,140 522,970 Net present value . . . . . . . . . $ 87,270 $ 73,400 $ 66,140 $ 72,970 Life of the project . . . . . . . . . 6 years 12 years 6 years 3 years Internal rate of return . . . . . . 16% 14% 18% 19%

Because the company’s required rate of return is 10%, a 10% discount rate has been used in the present value computations on the prior page. 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.
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 r anking d o y ou p refer? Why?