Answered: Project Number Investment required...…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 22E

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Question

Preference Ranking of Investment Projects

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.

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?

Project Number
Investment required...
Present value of cash inflows
at a 10% ciscount rate .
Net present value .
Life of the project.
Internal rate of return.
$(270,000) $(450,000) $(360,000) $(480.000)
522,970
433,400
$ 72,970 $ 73,400
567,270
336,140
$ 66,140
$ 87,270
6 years
18%
3 years
19%
12 years
6 years
16%
14%

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