QUESTION 4

Preference Ranking

Information on four investment proposals is given below:

Investment Proposal

A B C D

Investment required $(85,000) $(200,000) $(80,000) $(190,000)

Present value of cash flows 199,000 255,000 135,000 221,000

Net present value $34,000 $50,000 $45,000 $51,000

Life of the project 5 years 7 years 6 years 6 years

Required:

1. Compute the project profitability index for each investment proposal.
2. Rank the proposals in terms of preference.