Newago, Inc. is strapped for cash for investment projects and must decide which of four projects it will fund. Below are the projects and information about them:

Life of

Net the Internal

Investment Present Project Rate of

Project Required Value in Years Return

1 $80,000 $210,000 6 13%

2 $750,000 $340,000 10 17%

3 $845,000 $333,000 7 12%

4 $695,000 $202,000 5 18%

Required

• Compute the project profitability index for each project.

• Rank the four projects in order of preference in terms of :
• Internal rate of return
• Project profitability index
• Net present value.

• Which of the three rankings above do you prefer? Why? What are the strengths and weaknesses of each method?