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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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