Question

Information on four investment proposals is given below: Investment Proposal A B C D Investment required $ (790,000 ) $ (120,000 ) $ (120,000 ) $ (1,820,000 ) Present value of cash inflows 1,121,300 168,300 182,000 2,427,200 Net present value $ 331,300 $ 48,300 $ 62,000 $ 607,200 Life of the project 5 years 7 years 6 years 6 year

Answer 1

Answer:

Explanation:

1. The formula to compute the profitability index is shown below:

Profitability index = Net present value ÷ investment required

For Proposal A, it would be

=  $331,300 ÷ $790,000

= 0.42

For Proposal B, it would be

=  $48,300 ÷ $120,000

= 0.40

For Proposal C, it would be

=  $62,000 ÷ $120,000

= 0.52

For Proposal D, it would be

=  $607,200 ÷ $1,820,000

= 0.33

2. The proposal rank preference is shown below:

Proposal     Profitability index    Rank

A                  0.42                         Second

B                  0.40                         Third

C                  0.52                         First

D                  0.33                          fourth

So, it would be C, A, B and D