Question

Information on four investment proposals is given below: Investment required Present value of cash inflows Net present value Life of the project Investment Proposal B С D $(430,000) $(50,000) $(50,000) $(1,820,000) 631,600 70,500 76,800 2,429, 200 $ 201,600 $ 20,500 $ 26,800 $ 609,200 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 A B С D

Answer 1

Q1.

Computation of Project profitability index for each investment proposal and ranking them in preference:

Investment proposal	Project profitability index	Rank preferences
A	1.47	2
B	1.41	3
C	1.54	1
D	1.33	4

Notes:

1. Calaculation of profitability index(P.I)

Profitability index

= Present value of cash inflows ÷ Initial capital investment

Proposals	A	B	C	D
Present value of cash inflows(a)	$631600	$70500	$76800	$2429200
Initial capital investment(b)	$430000	$50000	$50000	$1820000
Profitability index(c)	1.47	1.41	1.54	1.33

2. Ranking preference

Ranking is given by considering the highest Profotability index as priority.

_____×_____

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