Problem #2 - Chapter 13 – Preference Ranking for Investment Projects The management of Revco Products is exploring four different investment opportunities, Information on the four projects under study follows: Description Investment Required ($) Present value of Cash Inflows ($) Net Present Value ($) Life of the Project (in years) Internal Rate of Return (%) Project C (450,000) 522,970 72,970 Project B (360,000) 433,400 73,400 Project A Project D (270,000) 336,140 66,140 6. (480,000) 567,270 87,270 3 12 18% 19% 14% 16% Because the company's required rate of return is 10%, a 10% discount rate has been used in the present value computations above. Limited funds are available for the investment, so the company cannot accept all the available projects. 1) Compute the project profitability index for each investment project. 2) Rank the four projects according to preference in terms of the following metrics: Net Present Value b. Project Profitability Index Internal Rate of Return a. C. 3) Which ranking do you prefer? State why by commenting on EACH metric above? [Hint: be sure to state the short-comings or advantages of each metric. 4) What if the information on the risk of each investment is provided; how would your computations above change? (Hint: Describe what you would do, you need not compute anything)
Problem #2 - Chapter 13 – Preference Ranking for Investment Projects The management of Revco Products is exploring four different investment opportunities, Information on the four projects under study follows: Description Investment Required ($) Present value of Cash Inflows ($) Net Present Value ($) Life of the Project (in years) Internal Rate of Return (%) Project C (450,000) 522,970 72,970 Project B (360,000) 433,400 73,400 Project A Project D (270,000) 336,140 66,140 6. (480,000) 567,270 87,270 3 12 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 the investment, so the company cannot accept all the available projects. 1) Compute the project profitability index for each investment project. 2) Rank the four projects according to preference in terms of the following metrics: Net Present Value b. Project Profitability Index Internal Rate of Return a. C. 3) Which ranking do you prefer? State why by commenting on EACH metric above? [Hint: be sure to state the short-comings or advantages of each metric. 4) What if the information on the risk of each investment is provided; how would your computations above change? (Hint: Describe what you would do, you need not compute anything)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem #2 - Chapter 13 – Preference Ranking for Investment Projects
The management of Revco Products is exploring four different investment opportunities, Information on the four projects under study
follows:
Project C
(450,000)
522,970
72,970
Project B
(360,000)
433,400
73,400
Project A
Description
Investment Required ($)
Present value of Cash Inflows ($)
Net Present Value ($)
Life of the Project (in years)
Project D
(270,000)
336,140
66,140
(480,000)
567,270
87,270
6
3
12
6
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 the investment, so the company cannot accept all the available projects.
1) Compute the project profitability index for each investment project.
2) Rank the four projects according to preference in terms of the following metrics:
Net Present Value
b. Project Profitability Index
Internal Rate of Return
a.
c.
3) Which ranking do you prefer? State why by commenting on EACH metric above? [Hint: be sure to state the short-comings or
advantages of each metric.
4) What if the information on the risk of each investment is provided; how would your computations above change? (Hint:
Describe what you would do, you need not compute anything)
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