Question

Selma Inc. is comparing several alternative capital budgeting projects as shown below:ProjectsA B CInitial investment $80,000 $120,000 $160,000Present value of net cash flows 90,000 110,000 200,000Using the profitability index, the projects rank as

Answer 1

Answer:

The rank will be  

1.Project C

2.Project A

3.Project B

Explanation:

The profitability index formula is

(NPV + Initial investment) ÷ Initial Investment

We have to get this index for each project

Project A ($80,000+90,000)÷ $80,000=2. 125

Project B ($120,000+ 110,000)÷ $120,00 =1.916

Project C ($160,000+ 200,000)÷$160,000 =2.25

The higher profitability index is from Project C,  then Project A and finally Project B