Preference Ranking of Investment Projects [LO4]

Yancey 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 Net the Internal Investment Present Project Rate of Project Required Value (years) Return A . . . . . . . . . . . $800,000 $221,615 7 18%

B . . . . . . . . . . . $675,000 $210,000 12 16%

C . . . . . . . . . . . $500,000 $175,175 7 20%

D . . . . . . . . . . . $700,000 $152,544 3 22%

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, which to accept second, and so forth.

The company’s investment funds are limited.

Required:

1. Compute the project profitability index for each project.

2. In order of preference, rank the four projects in terms of:

a. Net pr esent v alue.

b. Project pr ofitability i ndex.

c. Internal rate of return.

3. Which r anking d o y ou p refer? Why?