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The management of Revco Products is exploring four different investment opportunities
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.
Expert Solution
PFA
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