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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

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:

1. Compute the profitability index for each investment project.

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

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