Oxford Company has limited funds available for investment and must ration the fu
ID: 2491636 • Letter: O
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:
The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.
In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.
Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:
Explanation / Answer
1 Project Net Present Value Investment Required Profitability Index Internal Rate of Return A $5,97,340 $9,00,000 1.66 25% B $2,99,540 $6,95,000 1.43 17% C $3,38,717 $6,00,000 1.56 23% D $2,61,480 $8,00,000 1.33 22% Profitabbility Index= 1 + (Net Present Value / Initial Investment Required) Project A= 1+(597,340/900,000) 1.66 Project B= 1+(299,540/695,000) 1.43 Project C= 1+(338,717/600,000) 1.56 Project D= 1+(261,480/800,000) 1.33 2 Ranking of the Project Rank Net Present Value Profitability Index Internal Rate of Return 1 A A A 2 C C C 3 B B D 4 D D B Decision Rule : NPV:In case of mutually exclusive projects accept the project with higher NPV.So a project with highest NPV should be ranked as 1. IRR: The project having highest value of IRR should be accepted. So a project with highest IRR should be ranked as 1. PROFITABILITY INDEX: Accept the project which has higher PI. Condition to that the Profitability index must be greater then 1 else we should reject the project.So a project with highest PI should be ranked as 1.
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