The management of Revco Products is exploring four different investment opportun
ID: 2581260 • Letter: T
Question
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows Project Number 2 4 Investment required S(400,000) $(530,000) $(380,000) $(370,000) 508,530 Present value of cash inflows at a 8% discount rate Net present value Life of the project 554,760 463,860 $ 154,760 80,416 $ 128,530 $ 93,860 3 years 610,416 6 years 20% 12 years 11% 6 years 18% Internal rate of returrn 22% 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. (Round your answers to 2 decimal places.) Project ProfitabilityExplanation / Answer
1.
Profitability Index = Present value of cash inflows / Present value of cash outflows
Project 1:
Profitability index = $554760 / $400000
= 1.39 times
Project 2:
Profitability index = $610416 / $530000
= 1.15 times
Project 3:
Profitability index = $508530 / $380000
= 1.34 times
Project 4:
Profitability index = $463860 / $370000
= 1.25 times.
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