5 o Products is exploring four different investment opportunities Information on

Question

5 o Products is exploring four different investment opportunities Information on the four projects under study follows: Praject Number points Investment required Present value of cash inflows atles (270,080) $ (450,080) $(360,908) (488,800) 36,140 66,148 72,970 73,400 87,270 6 years 522,978 433,40e 567,278 discount rate Net present value Life of the project Internal rate of return eBook 3 years 12 years 6 years 18% 19% 14% 16% Print Because the company's required rate of return is 10%, a 10% 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 References Required: 1 Compute the project profitability index for each investment project Rank the four projects according to preference, in terms of net presen t value. project profitability index and internal rate of return Complete this question by entering your answers in the tabs below Required 1 Required 2 Compute the project profitability index for each investment pro Project ject. Round your answers to 2 decimal places.) Required 2>

Explanation / Answer

Project profitability Index = (NPV + Initial Investment)/Initial Investment

For project 1:

= (66140+270000)/270000

= 1.25

Project 2:

= (72970+450000)/450000

= 1.16

Project 3:

= (73400+360000)/360000

= 1.20

Project 4:

= (87270+480000)/480000

= 1.18

Rankings:

Now, for all three parameters NPV, IRR, profitability Index, the project which has higher value is rated higher.

Profitability Index:

Project 1: 1

Project 2: 4

Project 3: 2

Project 4: 3

NPV:

Project 1: 4

Project 2: 3

Project 3: 2

Project 4: 1

IRR:

Project 1: 2

Project 2: 1

Project 3: 4

Project 4: 3

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