A company is considering the following investment projects. (Ignore income taxes):
Project Q | Project R | Project S | |||||||
Investment required | $ | 86,000 | $ | 130,000 | $ | 244,000 | |||
Present value of cash inflows | $ | 94,060 | $ | 149,840 | $ | 267,440 | |||
The only cash outflows are the initial investments in the projects.
Rank the investment projects using the project profitability index.
Profitability index = Present value of cash inflows / Investment required
Project Q | Project R | Project S | |
Investment required (A) | $ 86,000 | $ 130,000 | $ 244,000 |
Present value of cash inflows (B) | $ 94,060 | $ 149,840 | $ 267,440 |
Profitability index = (B)/(A) | 1.094 | 1.153 | 1.096 |
Rank 1 | Project R |
Rank 2 | Project S |
Rank 3 | Project Q |
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