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

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

Required:

1.         Compute the project profitability index for each investment project.

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

(a)        Net present value

(b)        Project profitability index

(c)        Internal rate of return

3.         Which ranking do you prefer? Why?

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Project Number 2 3 4 Investment required S(450,000)| S(360,000) S(480,000) S(270,000) Present value of cash inflows at a 10% 336,140 discount rate 522,970 433,400 567,270 $ 66,140 S 72,970 S 73,400 S 87,270 Net present value Life of the project 3 years 12 years 6 years 6 years Intemal rate of return 14% 18% 19% 16%