Exercise 12-5 Preference Ranking [LO12-5] Information on four investment proposals is given below: Investment Proposal A...
Exercise 12-5 Preference Ranking [LO12-5]
Information on four investment proposals is given below:
| Investment Proposal | ||||||||||||
| A | B | C | D | |||||||||
| Investment required | $ | (720,000 | ) | $ | (160,000 | ) | $ | (130,000 | ) | $ | (1,560,000 | ) |
| Present value of cash inflows | 1,013,000 | 221,800 | 198,900 | 2,081,400 | ||||||||
| Net present value | $ | 293,000 | $ | 61,800 | $ | 68,900 | $ | 521,400 | ||||
| Life of the project | 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.
Homework Answers
1.
| A | B | C | D | |
| Present value of cash inflows (i) | 1,013,000 | 221,800 | 198,900 | 2,081,400 |
| Investment required (ii) | 720,000 | 160,000 | 130,000 | 1,560,000 |
| profitability index (i)/(ii) | 1.41 | 1.39 | 1.53 | 1.33 |
2.
| Project | profitability index | Rank |
| C | 1.53 | 1 |
| A | 1.41 | 2 |
| B | 1.39 | 3 |
| D | 1.33 | 4 |
Add Answer to:
Exercise 12-5 Preference Ranking [LO12-5]
Information on four investment proposals is given below:
Investment Proposal
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