Question

Exercise 7-5 (Algo) Preference Ranking (L07-5) Information on four investment proposals is given below: Investment required Present value of cash inflows Net present value Life of the project Investment Proposal Α B $(290,000) $(140,000) $(60,000) $ (1,300,000) 421,200 196,500 94,300 1,734,600 $ 131,200 $ 56,500 $ 34,300 $ 434,600 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.) 2. Rank the proposals in terms of preference. Investment Proposal Project Profitability Index Rank Preference

Answer 1

Project profitability index = Net present value/investment required

A	(131,200/290,000) = 0.45	2
B	(56,500/140,000) = 0.40	3
C	(34,300/60,000) = 0.57	1
D	(434,600/1,300,000) = 0.33	4

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