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 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 % The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company can’t accept all of the available projects. Required: 1. Compute the profitability index for each investment project. 2. Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.
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 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 % The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company can’t accept all of the available projects. Required: 1. Compute the profitability index for each investment project. 2. Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 |
336,140 | 522,970 | 433,400 | 567,270 | ||||||||
| $ | 66,140 | $ | 72,970 | $ | 73,400 | $ | 87,270 | |||||
| Life of the project | 6 years | 3 years | 12 years | 6 years | ||||||||
| 18 | % | 19 | % | 14 | % | 16 | % | |||||
The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company can’t accept all of the available projects.
Required:
1. Compute the profitability index for each investment project.
2. Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.
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