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:

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.

Required:

1. Compute the project profitability index for each investment project.

2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Project Number 1 2 3 4 Investment required $ (450,000 ) $ (540,000 ) $ (390,000 ) $ (340,000 ) Present value of cash inflows at a 8% discount rate 549,775 715,947 416,102 399,353 Net present value $ 99,775 $ 175,947 $ 26,102 $ 59,353 Life of the project 6 years 12 years 6 years 3 years Internal rate of return 15 % 14 % 10 % 17 %

Explanation / Answer

Answer:-1)-

2)-

Calulation of Project Profitablity Index Particulars Project Number 1 2 3 4 Net Present Value $ (A) 99775 175947 26102 59353 Investment required $ (B) 450000 540000 390000 340000 Profitablity Index C=A/B 0.22 0.33 0.07 0.17 Ranking 2 1 4 3

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