Galaxy Corporation is considering the following competing investment proposals:

Question

Galaxy Corporation is considering the following competing investment proposals:

    Aye            Bee                Cee Initial investment required................. $62,000         $74,000             $95,000 Net present value............................. $10,000         $ 8,000        $12,000 Internal rate of return.......................     15%           17%           18% Galaxy Corporation is considering the following competing investment proposals: Using the project profitability index, how should Galaxy rank these projects (i.e., highest to lowest)? Aye, Bee, Cee Aye, Cee, Bee Bee, Aye, Cee Bee, Cee, Aye Cee, Bee, Aye

Explanation / Answer

B) Aye, Cee, Bee

Profitability Index = NPV/Initial Investment
Aye = 10000/62000 = 0.1613
Bee = 8000/74000 = 0.1082
Cee = 12000/95000 = 0.1263

Hence, Aye > Cee > Bee

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