Wentworth Manufacturing is considering three capilal investment proposals
Wentworth Manufacturing is considering three capilal investment proposals. At this time, the company has funds available to pursue only one of the three investments
Requirement
Which investment should Wentworth Manufacturing pursue at this time? Why?
Since each investment presents a positive NPV, Wentworth Manufacturing should use the profitability index to compare the profitability of each investment.
Use the method selected above to compare the profitability of each investment beginning with Equipment A.
Homework Answers
Solution:
| Computation of Profitability Index | |||
| Particulars | Equipment A | Equipment B | Equipment C |
| NPV | $183,750.00 | $395,000.00 | $85,000.00 |
| Divided by: Initial investment | $1,531,250.00 | $1,580,000.00 | $2,125,000.00 |
| Profitability Index | 0.12 | 0.25 | 0.04 |
Company should investment in equipment as its having highest PI.
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Wentworth Manufacturing is considering three capilal investment proposals
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