Newaygo, 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 $360,000 $188,000 4 13%

2 $726,000 $292,000 8 17%

3 $676,000 $204,000 6 15%

4 $825,000 $342,000 7 14%

*An 9% discount rate was used to compute the net present value.

Required

1. Compute the project profitability index for each project.

2. Rank the four projects in order of preference in terms of :

3. Internal rate of return

4. Project profitability index

5. Net present value.

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