The management of Revco Products is exploring four different investment opportun

Question

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows: Project Number 2 Investment required (430,000) $(380,000) $(200,000) $(400,000) Present value of cash inflows at a 10% discount rate Net present value Life of the project 480,150 469,440 240,075 492,830 50,150 89,440 40,075 92,830 8 years 16 years8years 5 years Internal rate of return 13% 14% 15% 19% 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.

Explanation / Answer

Formulla for Profatibility Index PI = Present value of all cashinflow/ Intitial Investment

The Indexes of the projects under consideration would be

Project PI 1 $480,150/$430,000 1.12 2 $469,440/$380,000 1.24 3 $240,075/$200,000 1.20 4 $492,830/$400,000 1.23

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