The management of Revco Products is exploring four different investment opportun
ID: 2490016 • Letter: T
Question
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Project Number
Because the company’s required rate of return is 8%, a 8% 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.
Compute the project profitability index for each investment project. (Round your answers to 2 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
Profitability Index = (PV of future cash flows) ÷ Initial investment
Project
Profitability Index
1
1.25 (747110/60000)
2
1.17 (646123/550000)
3
1.65 (660905/400000)
4
1.23 (638880/520000)
Ranking of the Project:
Net Present Value
Net Present Value
Project Profitability Index
Internal Rate of Return
First preference
3
3
3
Second preference
1
1
4
Third preference
4
4
1
Fourth preference
2
2
2
Project
Profitability Index
1
1.25 (747110/60000)
2
1.17 (646123/550000)
3
1.65 (660905/400000)
4
1.23 (638880/520000)
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