Question

Information on four investment proposals is given below: Investment required Present value of cash inflows $ (130,000) 185,600 Investment Proposal BCD $ (140,000) $ (150,000) $ (1,260,000) 193,800 228,600 1,681,100 $ 53,800 $ 78,600 $ 421,100 Net present value 55,600 Life of the project 5 years 7 years 6 years 6 years Required: 1. Compute the project profitability index for each investment proposal (Round your answers to 2 decimal places.) Project Investment Profitability Proposal Index 2. Rank the proposals in terms of preference. OBCAD OCABD ODCBA OABCD

Answer 1

Question-1
1
Project Profitability Index = Net Present value/Investment required
Investment Proposal	Project Profitability Index
A	0.43	=55600/130000
B	0.38	=53800/140000
C	0.52	=78600/150000
D	0.33	=421100/1260000
2
C A B D

Question-2
Operating cost of old machine	13000
Less: Less operating cost of new machine	6000
Less: Annual Depreciation	5000	=50000/10
Annual incremental net operating income	2000
Cost of the new machine	50000
Less: Salvage value of old machine	20000
Initial investment	30000
Simple rate of return
Choose Numerator:	/	Choose Denominator:	=	Simple rate of return
Annual incremental net operating income	/	Initial investment	=	Simple rate of return
2000	/	30000	=	6.7%