Question

Information on four investment proposals is given below: Investment Proposal A B C D Investment required $ (190,000 ) $ (180,000 ) $ (170,000 ) $ (900,000 ) Present value of cash inflows 267,400 249,400 259,300 1,197,500 Net present value $ 77,400 $ 69,400 $ 89,300 $ 297,500 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.

Answer 1

Solution 1 & 2:

Computation of Profitability Index and ranking of Project
Particulars	A	B	C	D
Investment required	$1,90,000	$1,80,000	$1,70,000	$9,00,000
Net Present Value	$77,400	$69,400	$89,300	$2,97,500
Profitability Index (NPV / Investment required)	0.41	0.39	0.53	0.33
Ranking	2	3	1	4

Rank the proposals in terms of preference: C A B D