Question

Information on Tour Investment proposals is given below! Investment Proposal B D Investment required Present value of cash inflows $(90,000) $ (100,000) $ (70,000) $ (120,000) 126,000 138,000 105,000 160,000 $ 36,000 $ 38,000 $ 35,000 $ 40,000 5 years 7 years 6 years 6 years Net present value Life of the project 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

Answer 1

Project Investment Rank Preference Profitability Proposal Index A 1.40 2 1.38 В 3 C 1.50 1 D 1.33 1) Project Profitability Index for each investement proposal Present Value of Profitability Initial Investment Future Cash Investment (Y) Index X/Y) Proposal Inflows (X) 126,000 $ 138,000 $ 105,000 $ $ 1.40 А 90,000 В 100,000 1.38 C 70,000 1.50 160,000 $ 120,000 D 1.33

Note Profitability Index = Present Value of future cash inflows /Initial Investment Profitability Investment Rank 2) Proposal Index 1.40 A. 1.38 3 1.50 C 1.33 4 The Project which have highest Profitability index will be given the first preference, The Project which had least Profitability index willl be given the last preference Hence accordingl Ranks given in the above table based on the profitability index.