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