Question

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:

Project	Investment Required		Net Present Value		Life of the Project (years)	Internal Rate of Return
A	$	830,000	$	230,149	7	18	%
B	$	660,000	$	241,501	12	17	%
C	$	530,000	$	166,296	7	19	%
D	$	730,000	$	158,926	3	22	%

The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

Required:

1. Compute the project profitability index for each project.

2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.

Project	Project Profitability Index
A
B
C
D

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

Answer 1

730000 158926 Profitability of Index = Net present Value / Investment Required Calculation of Profitability Index A B с Investment Required 830000 660000 530000 Net Present Value 230149 241501 166296 Profitablility index: 0.366 0.314 (Net present value / Investment) Answers Project Project PI 0.28 OR 1.27 0.37 OR 1.37 0.31 OR 1.31 0.22 OR 1.31 0.277 0.218 Net Present Value Profitability index Internal Rate of return First Preference Second Preference Third Preference Fourth Preference Method Net Present Value Profitability index Internal Rate of return Criteria for Preferance Highest to Lowest Highest to Lowest Highest to Lowest