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 | $ | (460,000 | ) | $ | (410,000 | ) | $ | (310,000 | ) | $ | (430,000 | ) |
Present value of cash inflows at a 12% discount rate | 534,420 | 496,925 | 385,970 | 546,480 | ||||||||
Net present value | $ | 74,420 | $ | 86,925 | $ | 75,970 | $ | 116,480 | ||||
Life of the project | 11 years | 22 years | 11 years | 8 years | ||||||||
Internal rate of return | 16% | 15% | 17% | 19% | ||||||||
Because the companys required rate of return is 12%, a 12% 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. (Round your answers to 2 decimal places.) |
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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