Problem 7-21 (Static) Preference Ranking of Investment Projects [LO7-5]

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	$ (270,000)		$ (450,000)		$ (360,000)		$ (480,000)
Present value of cash inflows	336,140		522,970		433,400		567,270
Net present value	$ 66,140		$ 72,970		$ 73,400		$ 87,270
Life of the project	6	years	3	years	12	years	6	years
Internal rate of return	18%		19%		14%		16%

The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company cant accept all of the available projects.

Required:

Compute the profitability index for each investment project.

Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.