Oxford Company has limited funds available for investment and must ration the fu

Question

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:


Project Investment
Required Net
Present
Value Life of
the
Project
(years) Internal
Rate
of Return
(percent)
A $752,000 $853,164 5 17%
B $654,789 $556,415 15 13%
C $614,614 $863,213 6 12%
D $431,646 $543,136 2 23%

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The net present values above have been computed using a 11% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

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

Project Profitability
index
A -
B -
C -
D -

Explanation / Answer

Calculating the Net present values of each project: For Project-A: NPV = Present value of cash flows - Initial investment          = $853,164 - $752,000          = $101,164 For Project-B: NPV = $556,415 - $654,789          = ($98,374) FOr Project-C: NPV = $863,213 - $614,614          = $248,599 For Project-D: NPV = $543,136 - $431,646          = $111,490 Based on the NPV's, the project with the highest NPV should be accepted first. Out of the 4 projects, Porject-C is having the highest NPV. Project-C should be accepted first. Next project-D should be accepted and then Project-A whereas Project-B should be least accepted or otherwise rejected as it is having negative NPV. Calculating the Profitability Index of each project: For Project-A: Profitability Index = Present value of cash flows / Initial investment                             = $853,164 / $752,000                             = 1.13 > 1 For Project-B: Profitability Index = $556,415 / $654,789                            = 0.85 < 1 For Project-C: Profitability Index = $863,213 / 614,614                             = 1.40 > 1 For Project-D; Profitability Index = $543,136 / 431,646                            = 1.26 > 1

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