Question

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows: Life of Internal Net the Rate Present Project Value of Investment Required $880,000 $441,342 $685,000 $366,397 $580,000 $224,939 $780,000 $169,812 (years) Return 7 Project 24 A B 12 208 C 7 218 3 228 D The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth Required: 1. Compute the project profitability index for each project. 2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the project profitability index for each project. (Round your answers to 2 decimal places.) Project Project Profitability Index A D <Required 1 Required 2

Answer 1

Present value of future cash flows Net present value (NPV)Initial investment (INVEST) 1) Profitability Index Present value of future cash flows (PVCF)/ Net present value (NPV) (a) (b) (c)=(a)+(b) (q) / () PVCF Prof. Index PROJECT IRR NPV INVEST $441,342 $880,000 $1,321,342 [$1321342/ $880000] 24% A 1.50 $366,397 $685,000 $1,051,397 $804,939 [$1051397/$685000] 20% 1.53 $224,939 $580,000 [$804939 $580000] 21% C 1.39 $169,812 $780,000 $949,812 [$949812/$780000] D 22% 1.22 2) PROJECT RANK NPV RANK PI RANK IRR A IV III C III D IV IV II EXPLANATION: Rank-NPV: Project that yields the highest NPV is assigned rank-l, project with next highest NPV is assigned rank-lI, and so on... Rank-Pl: Project that yields the highest PI is assigned rank-l, project with next highest PI is assigned rank-lI, and so on... Rank-IRR: Project that yields the highest IRR is assigned rank-l, project with next highest IRR is assigned rank-lI, and so on...