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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 $ (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.

Project Profitability Index
1
2
3
4

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

Net Present Value Project Profitability Index Internal Rate of Return
First preference
Second preference
Third preference
Fourth preference

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