Comparing Projects Using Profitability Index
Dayton Corp has $2 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows:
| Project A | Project B | Project C | Project D |
Initial investment | $550,000 | $230,000 | $ 790,000 | $ 945,000 |
Present value of |
|
|
|
|
future cash flows | 765,000 | 415,000 | 1,200,000 | 1,560,000 |
Required:
1.Is Dayton able to invest in all of these projects simultaneously? Explain.
2.Calculate the profitability index for each project and prioritize them for Dayton.
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