Exercise 13-11 Preference Ranking of Investment Projects [LO13-5] Oxford Company

Question

Exercise 13-11 Preference Ranking of Investment Projects [LO13-5]

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.

Required:

1. Compute the project profitability index for each project.

2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.

Project Investment
Required Net
Present
Value Life of
the
Project
(years) Internal
Rate
of Return
(percent) A $ 920,000 $ 145,122 5 16 % B $ 705,000 $ 293,383 10 19 % C $ 620,000 $ 114,615 5 17 % D $ 820,000 $ 148,069 3 20 %

Explanation / Answer

Project A Project B Project C Project D IRR 16% 19% 17% 20% Net Present value 145122 293383 114615 148069 Initial Investment 920000 705000 620000 820000 Req1: Profitability Index 0.158 0.416 0.185 0.181 (Net presnt value/ Initial investment) Req2: Ranking on basis of NPV III I IV II (Highest NPV to be given first preference) Ranking on basis of Profitability Index IV I II III (Highest Index to be given first preference) Rankingon basis of IRR IV II III I (Highest IRR given first preference)

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