Question

Jill Harrington, a manager at Jennings Company, is considering several potential capital investment projects. Data on these projects follow: Project X Project Y Project Z Initial investment $40,000 $20,000 $50,000 Annual cash 25,000 10,000 25,400 inflows PV of cash 45.000 33,000 70,000 inflows Required: 1. Compute the payback period for each project and rank order them based on this criterion. (Round your answers to 2 decimal places.) Payback par Period Rani Project Project Project 2. Compute the NPV of each project and rank order them based on this criterion. NPV Ran Project Project Project 3. Compute the profitability index of each project and rank order them based on this criterion. (Round your answers to 2 decimal places.) PI Ran Project Project Project 4. If Jennings has limited funds to invest, which ranking should Jill recommend? Profitability Index Ranking NPV Ranking Payback Ranking

Answer 1

(1)

Payback period = initial investment/annual net cash flow

	Payback period	rank
project x	$40000/$25000 = 1.6 years	1
project y	$20000/$10000 = 2 years	3
project z	$50000/$25400 = 1.97 years	2

(2)

Net present value = present value of annual net cash flow - initial investment

	NPV	Rank
project x	$45000 - $40000 = $5000	3
project y	$33000 - $20000 = $13000	2
project z	$70000 - $50000 = $20000	1

(3)

profitability index = present value of annual net cash flow/initial investment

	profitability index	rank
project x	$45000/$40000 = 1.13	3
project y	$33000/$20000 = 1.65	1
project z	$70000/$50000 = 1.40	2

(4)

Jil should recommend profitability index ranking