Janesville Company is investigating four different investment opportunities. Inf

Question

Janesville Company is investigating four different investment opportunities. Information on the four projects under study is given below: Project Number 2 3 4 Investment required Present value of cash inflows at a 12% discount rate $470,000)$(420,000) $(320,000) $(440.000) 452,210528,440 616,650 507,908 Net present value 146,650 87908 132,210 88,440 Life of the project Internal rate of return 6 years 22% 12 years 16% 6years 26% 3 years 23% Because the company's required rate of return is 12%, a 12% 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

1 Project Profitability index 1 0.312 =146650/470000 2 0.209 =87908/420000 3 0.413 =132210/320000 4 0.201 =88440/440000 2 Net present value Profitability index Internal rate of return First preference 1 3 3 Second preference 3 1 4 Third preference 4 2 1 Fourth preference 2 4 2

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