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PROBLEM 13 17 Preference Ranking of Investment Projects LO4 Austin Company is investigating four different investment opportunities Information on the four projects under study is given below

PROBLEM 13–17 Preference Ranking of Investment Projects [LO4]

Austin Company is investigating four different investment opportunities. Information on the four projects under study is given below:

 

 

 

Project

Number

 

1

2

3

4

Investment required . . . . . . .

Present value of cash inflows at a 10%

discount rate. . . . . . . . . . .

$(480,000)

 

 

567,270

$(360,000)

 

 

433,400

$(270,000)

 

 

336,140

$(450,000)

 

 

522,970

Net present value. . . . . . . . .

$   87,270

$   73,400

$   66,140

$   72,970

Life of the project . . . . . . . . . Internal rate of return . . . . . .

6 years

16%

12 years

14%

6 years

18%

3 years

19%

 

 

 

 

 

Because the company’s required rate of return is 10%, a 10% discount rate has been used in the present value computations on the prior page. 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?

Jun 28 2020 View more View Less

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