The management of Revco Products is exploring five different investment opportunities. Information on the five projects under study follows:

The company?s required rate of return is 10%; thus, a 10% discount rate has been used in the preceding present value computations. Limited funds are available for investment, and so the company cannot accept all of the available projects.

Required:

1. Compute the profitability index for each investment project.

2. Rank the five projects according to preference, in terms of

a. Net present value.

b. Profitability index.

3. Which ranking do you prefer? Why?

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Project Number 2 3 Investment required $(270,000) $(450,000) $(400,000) $(360,000) $(480,000) Present value of cash inflows at a 10% discount rate 336,140 522.970 379,760 433,400 567,270 Net present value $ (20,240) $ 87,270 $ 66,140 $ 72,970 $ 73,400 Life of the project 5 years 12 years 3 years 6 years 6. years