Shaylee Corp has $2 million to invest in new projects. The company’s managers ha

Question

Shaylee Corp has $2 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Project A Project B Project C Project D

Initial investment $ 415,000 $ 230,000 $ 720,000 $ 945,000

Present value of future cash flows 765,000 415,000 1,200,000 1,560,000

  

Calculate the profitability index for each project. (Round your answers to 4 decimal places.)

Project A

Project B

Project C

Project D

What is Shaylee’s order of preference based on the profitability index?

Project A

Project B

Project C

Project D

Required: 1. Is Shaylee able to invest in all of these projects simultaneously? Yes No

Explanation / Answer

Solution:

1) Is Shaylee able to invest in all of these projects simultaneously ------ NO

Since the company has limited excess of money i.e. 2 Million to invest.

2) Profitability Index = Present Value of Cash INflows / Present Value of Cash Outflows

Project

Profitability Index

A

1.8434

(765,000 / 415,000)

B

1.8043

(415,000 / 230,000)

C

1.6667

(1200,000 / 720,000)

D

1.6508

(1560,000 / 945,000)

Order of Preference

Project

Order of Preference

A

First Preference

B

Second Preference

C

Third Preference

D

Fourth Preference

Project

Profitability Index

A

1.8434

(765,000 / 415,000)

B

1.8043

(415,000 / 230,000)

C

1.6667

(1200,000 / 720,000)

D

1.6508

(1560,000 / 945,000)

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