Question

Prior to beginning work on this discussion, please read the article Capital Investment Appraisal Techniques: A Survey of Current Usage (Links to an external site.)Links to an external site. by Sangster (1993).

After setting the company’s goals, managers evaluate capital investment projects and decide which should be funded. Suppose a company has four different capital budgeting projects from which to choose but has constrained funds and cannot implement all of the projects.

The following table contains information about four projects in which X Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about the company’s potential project.

Project	Investment Required	Net Present Value	Life of Project	Internal Rate of Return	Profitability Index	Payback Period in Years	Accounting Rate of Return
A	$ 226,000	$ 36,908	5	21%	1.17	2.97	20%
B	$ 406,000	$ 50,740	6	24%	1.13	3.13	15%
C	$1,040,000	$152,325	3	19%	1.16	2.18	14%
D	$1,630,000	$ 19,870	4	14%	1.02	3.00	23%

Part 1: Rank the four projects in order of preference by using the following table:

	(a) Net Present Value	(b) Profitability Index	(c) Internal Rate of Return	(d) Payback Period	(e) Average Rate of Return
1st preferred	Project A, B, C, or D?
2nd preferred
3rd preferred
4th preferred

Part 2: Write a response in an initial post of at least 200 words discussing the usefulness of capital investment techniques (net present value, profitability index, internal rate of return, payback period, and average rate of return) in selecting the four alternative investment opportunities in part 1.

Answer 1

	(a) Net Present Value	(b) Profitability Index	(c ) Internal Rate Of Return	(d) Payback Period	(e ) Average Rate of Return
1st Preferred	C	A	B	C	D
2nd Preferred	B	C	A	A	A
3rd Preferred	A	B	C	D	B
4th Preferred	D	D	D	B	C

Net Present Value
Net present value is the present value of cash flows less investment, Project are ranked on the basis of highest NPV provided by the project. Projects with negative NPV are straight away rejected.

Internal Rate of Return
It is the rate of return provided by the investment, Project are ranked on the basis of highest IRR provided by the project. Projects with IRR lower than Required rate of return are rejected.

Profitability Index
It shows value of investment for every dollar invested. It is more useful for choosing the Project, Project are ranked on the basis of highest PI provided by the project.

Payback Period
It is the period in which investment will be recovered. The shorter period is preferred as more time remains for earnings. Projects are ranked on the basis of lowest Payback period.

Accounting rate of Return
It is the rate of return that the investment is providing. Project are ranked on the basis of highest ARR provided by the project.