Question

Information on four investment proposals is given below: Investment required Present value of cash inflows Investment Proposal A B C D $ (720,000) $ (160,000) $(130,000) $(1,560,000) 1,013,000 221,800 198,900 2,081,400 $ 293,000 $ 61,800 $ 68,900 $ 521,400 5 years 7 years 6 years 6 years Net present value Life of the project Required: 1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference. Investment Project Rank · Profitability Proposal Preference Index A (0.40) Second B (0.38) Third (0.53) First D (0.33) Fourth

Answer 1

Requirement: 1 Method: 1 Profitability Index method Present value of cash Inflow Present value of Intial Investment Profitable Index Rank Project A Project B Project C Project D 1013000 / 1.41 Second 720000 221800 160000 1.39 Third 198900/ 130000 1.53 First 2081400 1560000 1.33 Fourth Method: 2 NET Profitability Index method Present value of Intial Investment = NPV Profitable Index Rank Project A Project B Project C Project D 293000 / 0.41 Second 0.39 Third 720000 61800/ 160000 68900/ 130000 0.53 First 521400 1560000 0.33 Fourth

Rank the proposals in the terms of preference Requirement: 2 Investment Project Profitability Index RankPreference Proposal Second A 0.41 Third 0.39 First Fourth 0.53 0.33 Note: As there are two formulas to find Profitable Index method, problem is solved based on two methods