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The management of Riker Inc. is exploring five different investment opportunities. Information on the five projects under study follows:     Project Number   1   2   3   4   5 Investment required $ (310,000 )   $ (270,000 )   $ (390,000 )   $ (480,000 )   $ (330,000 ) Present value of cash inflows at a 10% discount rate   394,630       340,260       482,970       570,930       278,850   Net present value $ 84,630     $ 70,260     $ (92,970 )   $ 90,930     $ 51,150   Life of the project   6 years       3 years       5 years       12 years       6 years         The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the preceding present value computations. Limited funds are available for investment, and so the company cannot accept all of the available projects.   Required: 1. Compute the profitability index for each investment project. (Round your answers to 2 decimal places.)           2. Rank the five projects according to preference, in terms of (a) net present value, (b) profitability index.           3. Which ranking do you prefer?     multiple choice Net present value Profitability index

The management of Riker Inc. is exploring five different investment opportunities. Information on the five projects under study follows:     Project Number   1   2   3   4   5 Investment required $ (310,000 )   $ (270,000 )   $ (390,000 )   $ (480,000 )   $ (330,000 ) Present value of cash inflows at a 10% discount rate   394,630       340,260       482,970       570,930       278,850   Net present value $ 84,630     $ 70,260     $ (92,970 )   $ 90,930     $ 51,150   Life of the project   6 years       3 years       5 years       12 years       6 years         The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the preceding present value computations. Limited funds are available for investment, and so the company cannot accept all of the available projects.   Required: 1. Compute the profitability index for each investment project. (Round your answers to 2 decimal places.)           2. Rank the five projects according to preference, in terms of (a) net present value, (b) profitability index.           3. Which ranking do you prefer?     multiple choice Net present value Profitability index

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 2PA
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The management of Riker Inc. is exploring five different investment opportunities. Information on the five projects under study follows:

 

  Project Number
  1   2   3   4   5
Investment required $ (310,000 )   $ (270,000 )   $ (390,000 )   $ (480,000 )   $ (330,000 )
Present value of cash inflows at a 10%
discount rate		   394,630       340,260       482,970       570,930       278,850  
Net present value $ 84,630     $ 70,260     $ (92,970 )   $ 90,930     $ 51,150  
Life of the project   6 years       3 years       5 years       12 years       6 years  
 

 

 

The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the preceding present value computations. Limited funds are available for investment, and so the company cannot accept all of the available projects.

 

Required:

1. Compute the profitability index for each investment project. (Round your answers to 2 decimal places.)

 

 

 

 

 

2. Rank the five projects according to preference, in terms of (a) net present value, (b) profitability index.

 

 

 

 

 

3. Which ranking do you prefer?

 

 

multiple choice

Net present value

Profitability index

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