Introduction To Managerial Accounting
8th Edition
ISBN: 9781259917066
Author: BREWER, Peter C., Garrison, Ray H., Noreen, Eric W.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 12, Problem 11E
Preference Ranking of Investment Projects
Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:
The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.
Required:
1. Compute the project profitability index for each project.
2. In order of preference, rank the four projects in terms of:
a.
b. Project profitability index.
c.
3. Which ranking do you prefer? Why?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Preference Ranking of Investment Projects
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Because the company’s required rate of return is 10%, 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?
Information on four investment proposals is given below:
Investment required.
Present value of cash inflows
Net present value
Life of the project
Answer is complete but not entirely correct.
Profitability
Index
Investment
Proposal
ABCO
A
В
Required:
1. Compute the profitability index for each investment proposal. (Round your answers to 2 decimal places.)
2. Rank the proposals in terms of preference.
с
D
3
0.41
0.38
0.50
0.33
Rank
Preference
A
$ (240,000)
337,300
$ 97,300
Second
Third
First
Fourth
✓
✔
5 years
Investment Proposal
$ (73,500)
110,250
$36,750
B
$ (105,000)
144,900
$ 39,900
7 years
6 years
$ (126,000).
168,000
$ 42,000
6 years
The Company has three potential projects from which to choose. Selected information on each of the three projects follows:
Project A
Project B
Project C
Investment required
$44,400
$55,700
$53,100
Net present value of project
$49,100
$74,100
$69,100
Using the profitability index, rank the projects from most profitable to least profitable.
A, B, C
B, A, C
B, C, A
C, B, A
Chapter 12 Solutions
Introduction To Managerial Accounting
Ch. 12.A - Basic Present Value Concepts Annual cash inflows...Ch. 12.A - Basic Present value Concepts Julie has just...Ch. 12.A - Prob. 3ECh. 12.A - Prob. 4ECh. 12.A - Basic Present Value Concepts The Atlantic Medical...Ch. 12.A - Prob. 6ECh. 12 - What is the difference between capital budgeting...Ch. 12 - Prob. 2QCh. 12 - Prob. 3QCh. 12 - Prob. 4Q
Ch. 12 - Why are discounted cash flow methods of making...Ch. 12 - Prob. 6QCh. 12 - Identify two simplifying assumptions associated...Ch. 12 - Prob. 8QCh. 12 - Prob. 9QCh. 12 - Prob. 10QCh. 12 - Prob. 11QCh. 12 - Prob. 12QCh. 12 - How is the project profitability index computed,...Ch. 12 - Prob. 14QCh. 12 - Prob. 15QCh. 12 - Prob. 1AECh. 12 - The Excel worksheet form that appears below is to...Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Prob. 3F15Ch. 12 - Prob. 4F15Ch. 12 - Prob. 5F15Ch. 12 - Prob. 6F15Ch. 12 - Prob. 7F15Ch. 12 - Prob. 8F15Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Prob. 11F15Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Prob. 13F15Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Cardinal Company is considering a five-year...Ch. 12 - Payback Method The management of Unter...Ch. 12 - Net Present Value Analysis The management of...Ch. 12 - Internal Rate of Return Wendell’s Donut Shoppe is...Ch. 12 - Uncertain Future Cash Flows Lukow Products is...Ch. 12 - Prob. 5ECh. 12 - Simple Rate of Return Method The management of...Ch. 12 - Prob. 7ECh. 12 - Payback Period and Simple Rate of Return Nicks...Ch. 12 - Prob. 9ECh. 12 - Prob. 10ECh. 12 - Preference Ranking of Investment Projects Oxford...Ch. 12 - Prob. 12ECh. 12 - Payback Period and Simple Rate of Return...Ch. 12 - Comparison of Projects Using Net Present Value...Ch. 12 - Internal Rate of Return and Net Present Value...Ch. 12 - Net Present Value Analysis Windhoek Mines, Ltd.,...Ch. 12 - Net Present Value Analysis; Internal Rate of...Ch. 12 - Net Present Value Analysis Oakmont Company has an...Ch. 12 - Simple Rate of Return; Payback Period Paul Swanson...Ch. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Comprehensive Problem - Lou Barlow, a divisional...Ch. 12 - Prob. 24PCh. 12 - Prob. 25PCh. 12 - Prob. 26PCh. 12 - Net Present Value Analysis In five years, Kent...Ch. 12 - Prob. 28PCh. 12 - Prob. 29P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Net present value method, present value index, and analysis for a service company First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows: Instructions 1. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value table appearing in Exhibit 2 of this chapter. 2. Determine a present value index for each project. (Round to two decimal places.) 3. Which project offers the largest amount of present value per dollar of investment? Explain.arrow_forwardOxford Company has limited funds available for investment and must ration the funds among the four competing projects shown below: Project Required A Inflows $ 120,000 $ 239,323 $ 133,000 $ 212,000 $ 102,000 $ 170,035 $ 172,000 $ 248,136 The net present values above have been computed using a 10% discount rate. Required: 1. Compute the profitability index for each project. 2. In order of preference, rank the four projects in terms of net present value, profitability index, and internal rate of return. B Present Investment Value of Cash C D Required 1 Required 2 Life of the Project (years) 7 12 7 Complete this question by entering your answers in the tabs below. Project A Compute the profitability Index for each project. Note: Round your answers to 2 decimal places. 3 Profitability Index Internal Rate of Return 20% 22% 19% 21% Prev 5 of 5 www Nextarrow_forwardOxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows: Life of Net the Internal Project (years) of Return Investment Present Rate Project Required $970,000 $730,000 $670,000 $830,000 Value $176,514 $175,933 $185,782 $129,082 A 6. 16% В 11 15% C 19% 17% The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.arrow_forward
- The senior management of Netherworld Ltd is evaluating four project proposals and will select one project to invest in. The following summary information is available: Project Code Initial Investment Required Net Present Value Project life (years) A 172,000 48,000 7 B 155,000 48,000 12 C 115,000 39,100 7 D 141,000 38,500 3 Required: Calculate the profitability index for each project. In order of preference, rank the four projects in terms of net present value and the profitability index. Which project do you think should be chosen?arrow_forwardCooney Co. is evaluating the following mutually exclusive projects. The manager has determined that the appropriate discount rate is 6.2% for all the recommended projects. Rank order the projects based on the profitability index. Project A Project B Project C (35,000) (65,000) (86,000) Year 0 1 2 3 55,000 40,000 22,000 22,000 44,000 44,000 35,000arrow_forwardCooney Co. is evaluating the following mutually exclusive projects. The manager has determined that the appropriate discount rate is 6.2% for all the recommended projects. Rank order the projects based on the profitability index. Year Project A Project B Project C 0 (35,000) (65,000) (86,000) 1 - 40,000 44,000 2 - 22,000 44,000 3 55,000 22,000 35,000arrow_forward
- Using accounting rate of return to make capital investment decisions Carter Company is considering three investment opportunities with the following accounting rates of return: Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company’s required rate of return is 8%.arrow_forwardSuppose the following two independent investment opportunities are available to a company. The appropriate discount rate is 8 percent. Year O 1 2 3 Project Alpha -$4,500 b. 2,300 2,200 1,450 a. Compute the profitability index for each of the two projects. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Project Alpha Project Beta Project Beta -$ 6,100 1,350 4,500 4,000 Profitability Index Which project(s), if either, should the company accept based on the profitability index rule? Project Alpha O Project Beta Neither project O Both projectsarrow_forwardCarter Company is considering three investment opportunities with the following accounting rates of return: Project Y Project X 13.25% Project Z 10.47% ARR 6.58% Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company's required rate of return is 8%. (1 = most desriable and 3= least desirable. Select whether each project should be accepted or rejected.) C Rank Accept/Reject Project X Project Y Project Z @ # * $ IOL 4 % 2 6 4 & 7 4 8 ( 9 ➤W Oarrow_forward
- A. Calculate the profitability index for project X. B. Calculate the profitability for project Y C. Using the NPV method combined with the PI aporoach, which project would you select? Use a discount rate of 13 percentarrow_forwardpoints) possible S Carter Company is considering three investment opportunities with the following accounting rates of return: Project X Project Y Project Z ARR 13.25% 6.58% 10,47% Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company's required rate of return is 8%. (1 = most desriable and 3 = least desirable. Select whether each should be accepted or rejected.) Project Rank Accept/Reject 4 deler "k I % 1 2 3 4 5 6 QWERT A trl Project X Project Y Project Z caps lock shift t fn اب 2 @ Z # S $ alt الالالا C V G & Y B hp 7 H N 8 144 ( 9 ا۔ K M U O O P > ie alt ? 7 4 J backspace pause ctri <arrow_forwardUse the information provided to answer the questions Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License