Question

EXERCISE 13-4 Preference Ranking [LO4] Information on four investment proposals is given below: Investment Proposal Investment required 135,000 221,000 119,000 250,000 $34,000 50,000 $45,000 S 51,000 6 years 7 years 6 years Required: 1. Compute the project profitability index for each investment proposal. 2. Rank the proposals in terms of preference.

Answer 1

		A	B	C	D
	Investment Required	$     85,000.00	$ 2,00,000.00	$     90,000.00	$ 1,70,000.00
	Present Value of cash flow	$ 1,19,000.00	$ 2,50,000.00	$ 1,35,000.00	$ 2,21,000.00
	NPV	$     34,000.00	$     50,000.00	$     45,000.00	$     51,000.00
	Life of the Project	5	7	6	6	Years
Ans)		A	B	C	D
	NPV=(A)	$     34,000.00	$     50,000.00	$     45,000.00	$     51,000.00
	Investment Required=(B)	$     85,000.00	$ 2,00,000.00	$     90,000.00	$ 1,70,000.00
	Project Profitability Index=(A)/(B)	0.4	0.25	0.5	0.3
	Ranking	2	4	1	3
	Profitability Index=NPV/Investment required
	On the basis of NPV project D would be accepted and on the basis of profitability index project C would be accepted.