Exercise 11-9 Preference Ranking of Investment Projects [LO11-3] Oxford Company
ID: 2524370 • Letter: E
Question
Exercise 11-9 Preference Ranking of Investment Projects [LO11-3]
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) Computation of Profitability Index
PI= (NPV+ Initial Investment)/ Initial Investment
Project Profitability Index
A (900000+319400)/9000000= 1.35
B (770000+464050)/770000 = 1.60
C (750000+338750)/750000 = 1.45
D (950000+207050)/950000 = 1.22
(2) Ranking of Project
The most economical project is given 1st preference and thereafter lower rank
Ranking of Project on the basis of NPV
A higher NPV given 1st preference then lower NPV
Project NPV Rank
A 319400 Third
B 464050 First
C 338750 Second
D 207050 fourth
Profitability Index: Ranking done using higher profitability index index 1st rank and as so on
Project PI Rank
A 1.35 third
B 1.60 First
C 1.45 Second
D 1.22 Fourth
Ranking of Project on the basis of IRR
An higher IRR is more desirable so given 1st preference then lower IRR
Project IRR Rank
A 21% Third
B 22% Second
C 24% First
D 20% Fourth
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