Question

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:
Project Investment Required Net Present Value Life of the Project (years) Internal Rate of Return (percent)
A $860,000 $473,750 8 24
B 675,000 354,930 13 19
C 560,000 170,895 8 18
D 760,000 160,190 3 22
Project Investment Required Net Present Value Life of the Project (years)Internal Rate of Return (percent)

The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

1.Compute the project profitability index for each project.

2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.

Answer 1

Answer: Please refer to Explanation,

Explanation:

1. The Profitability Index is a ratio analysis instrument that measures the amount of payoff per Investment. It is calculated with the following simple formula,

= Net Present Value / Investment Required.

Project A

= 473,750/ 860,000

= 0.55

Project B

= 354,930/ 675,000

= 0.53

Project C

= 170,895 / 560,000

= 0.31

Project D

= 169,190 / 760,000

= 0.22

2. - According to Net Present Value

a. Project A

b. Project B

c. Project C

d. Project D

- According to Project Profitability Index

a. Project A

b. Project B

c. Project C

d. Project D

- According to Internal Rate of Return

a. Project A

b. Project D

c. Project B

d. Project C.