Problem 12-21 Preference Ranking of Investment Projects [LO12-5]

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:

	Project Number
	1			2			3			4
Investment required	$	(450,000	)	$	(400,000	)	$	(300,000	)	$	(300,000	)
Present value of cash inflows at a 10% discount rate		490,183			477,004			348,400			373,050
Net present value	$	40,183		$	77,004		$	48,400		$	73,050
Life of the project		6 years			12 years			6 years			3 years
Internal rate of return		13	%		14	%		15	%		23	%

Because 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 net present value, project profitability index and internal rate of return.