The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows: Project Number 1 2 3 4 Investment required $ (270,000 ) $ (450,000 ) $ (360,000 ) $ (480,000 ) Present value of cash inflows 336,140 522,970 433,400 567,270 Net present value $ 66,140 $ 72,970 $ 73,400 $ 87,270 Life of the project 6 years 3 years 12 years 6 years Internal rate of return 18 % 19 % 14 % 16 % The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company can’t accept all of the available projects. Required: 1. Compute the profitability index for each investment project. 2. Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows: Project Number 1 2 3 4 Investment required $ (270,000 ) $ (450,000 ) $ (360,000 ) $ (480,000 ) Present value of cash inflows 336,140 522,970 433,400 567,270 Net present value $ 66,140 $ 72,970 $ 73,400 $ 87,270 Life of the project 6 years 3 years 12 years 6 years Internal rate of return 18 % 19 % 14 % 16 % The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company can’t accept all of the available projects. Required: 1. Compute the profitability index for each investment project. 2. Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 2PA
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The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Project Number | ||||||||||||
1 | 2 | 3 | 4 | |||||||||
Investment required | $ | (270,000 | ) | $ | (450,000 | ) | $ | (360,000 | ) | $ | (480,000 | ) |
Present value of |
336,140 | 522,970 | 433,400 | 567,270 | ||||||||
$ | 66,140 | $ | 72,970 | $ | 73,400 | $ | 87,270 | |||||
Life of the project | 6 years | 3 years | 12 years | 6 years | ||||||||
18 | % | 19 | % | 14 | % | 16 | % | |||||
The net present values above have been computed using a 10% discount rate. Limited funds are available for investment, so the company can’t accept all of the available projects.
Required:
1. Compute the profitability index for each investment project.
2. Rank the four projects according to preference, in terms of net present value, profitability index, and internal rate of return.
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