Information on four investment proposals is given below:

Information on four investment proposals is given below:

		Investment Proposal
	A			B			C			D
Investment required	$	(270,000	)	$	(90,000	)	$	(100,000	)	$	(2,800,000	)
Present value of cash inflows		393,500			127,100			151,300			3,738,500
Net present value	$	123,500		$	37,100		$	51,300		$	938,500
Life of the project		5 years			7 years			6 years			6 years

Required:

1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.)

2. Rank the proposals in terms of preference.

Explanation

1.

The project profitability index for each proposal is:

Investment Proposal	Net Present Value (a)		Investment Required (b)		Project Profitability Index (a)÷(b)
A	$	123,500	$	270,000	0.46
B	$	37,100	$	90,000	0.41
C	$	51,300	$	100,000	0.51
D	$	938,500	$	2,800,000	0.34

2.

The ranking is:

Investment Proposal	Project Profitability Index
C	0.51
A	0.46
B	0.41
D	0.34

Note that proposal D has the highest net present value, but it ranks lowest in terms of the project profitability index.

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