Austin Company is investigating four different investment opportunities. Informa
ID: 2376309 • Letter: A
Question
Austin Company is investigating four different investment opportunities. Information on the four projects under study is given below:
Project Number
Because the company%u2019s required rate of return is 14%, a 14% discount rate has been used in the present value computations above.
Compute the project profitability index for each investment project. (Round your answers to 3 decimal places.)
Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.
Project Number
Explanation / Answer
Required:
1. Compute the project profitability index for each investment project.
Project profitability index = NPV / Investment Required
Project Number 1 2 3 4
Net present value $87,270 $73,400 $66,140 $72,970
Investment required $4,80,000 $3,60,000 $2,70,000 $4,50,000
Project profitability index 0.1818125 0.2038888889 0.244962963 0.1621555556
Present value of cash inflows (10%)/Investment Req. 1.1818125 1.2038888889 1.244962963 1.1621555556 (Not in text)
2. Rank the four projects according to preference, in terms of:
Project Number 1 2 3 4
a. NPV 1 2 4 3
b. PPI 3 2 1 4
c. IRR 3 4 2 1
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