Question

Shaylee Corp has $2.20 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Project A Project B Project C Project D

Initial investment $ 730,000 $ 410,000 $ 970,000 $ 1,125,000

Present value of future cash flows $ 945,000 $ 505,000 $ 1,700,000 $ 1,260,000

Required:
1.	Is Shaylee able to invest in all of these projects simultaneously?
	Yes No

  

2.	Calculate the profitability index for each project. (Round your answers to 4 decimal places.) Project A Project B Project C Project D What is Shaylee’s order of preference based on the profitability index? Project A Project B Project C Project D

Answer 1

1
Total Investment required	3235000	=730000+410000+970000+1125000
NO, Shaylee will not be able to invest in all of these projects simultaneously
2
	Project A	Project B	Project C	Project D
Present value of future cash flows	945000	505000	1700000	1260000
Divide by Initial investment	730000	410000	970000	1125000
Profitability index	1.2945	1.2317	1.7526	1.1200
3
	Rank
Project A	2
Project B	3
Project C	1
Project D	4