The management of Revco Products is exploring four different investment opportunities. Information onthe four projects under study follows:Project Number1 2 3 4Investment required ....................... $(270,000) $(450,000) $(360,000) $(480,000)Present value of cashinfl ows at a 10%discount rate .............................. 336,140 522,970 433,400 567,270Net present value .......................... $ 66,140 $ 72,970 $ 73,400 $ 87,270Life of the project ........................... 6 years 3 years 12 years 6 yearsInternal rate of return ..................... 18% 19% 14% 16%The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the present valuecomputations above. Limited funds are available for investment, so the company can’t accept all of theavailable projects.Required:1. Compute the project profitability index for each investment project.2. Rank the four projects according to preference, in terms of:a. Net present valueb. Project profitability indexc. Internal rate of return3. Which ranking do you prefer? Why?
The management of Revco Products is exploring four different investment opportunities. Information on
the four projects under study follows:
Project Number
1 2 3 4
Investment required ....................... $(270,000) $(450,000) $(360,000) $(480,000)
Present value of cash
infl ows at a 10%
discount rate .............................. 336,140 522,970 433,400 567,270
Net present value .......................... $ 66,140 $ 72,970 $ 73,400 $ 87,270
Life of the project ........................... 6 years 3 years 12 years 6 years
Internal rate of return ..................... 18% 19% 14% 16%
The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the present value
computations above. Limited funds are available for investment, so the company can’t accept all of the
available projects.
Required:
1. Compute the project profitability index for each investment project.
2. Rank the four projects according to preference, in terms of:
a. Net present value
b. Project profitability index
c. Internal rate of return
3. Which ranking do you prefer? Why?
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