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The management of Revco Products is exploring four different investment opportunities

Accounting

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:

 

Project Number

 

1

2

3

4

Investment required

$

(270,000

)

$

(450,000

)

$

(360,000

)

$

(480,000

)

Present value of cash inflows at a 10% discount rate

 

336,140

 

 

522,970

 

 

433,400

 

 

567,270

 

Net present value

$

66,140

 

$

72,970

 

$

73,400

 

$

87,270

 

Life of the project

 

6 years

 

 

3 years

 

 

12 years

 

 

6 years

 

Internal rate of return

 

18

%

 

19

%

 

14

%

 

16

%


 

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.

 

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.

 

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