Question : Chapter 84
The management of Revco Products : 3033
Chapter 84
The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:
Because the company’s required rate of return is 10%, 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. (Round your answers to 2 decimal places.)
2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Project Number 


1 
2 
3 
4 

Investment required 
$ 
(450,000 
) 

$ 
(400,000 
) 

$ 
(300,000 
) 

$ 
(420,000 
) 
Present value of cash inflows at a 10% discount rate 

584,550 



482,460 



324,750 



533,500 

Net present value 
$ 
134,550 


$ 
82,460 


$ 
24,750 


$ 
113,500 

Life of the project 

11 years 



22 years 



11 years 



8 years 

Internal rate of return 

16 
% 


13 
% 


12 
% 


17 
% 