NPV and Profitability Index
Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:
Project
A B C D E
Present Value of net cash inflows $24,000 $44,000 $15,000 $30,000 $50,000
Investment Cost 20,000 40,000 16,000 24,000 41,000
Required:
1. Determine the net present value and the profitability index for each project.
2. Which projects are acceptable using the profitability index as a screening tool?
3. What would be the ranking of the acceptable projects according to the profitability indexes?
4. Interpretive Question: What additional information would be needed to screen and rank the projects using the internal rate of return method? What are the decision rules using the IRR method for screening and ranking capital budgeting projects?
The problem illustrates how to screen projects for capital investment. The problem had five different alternative projects available for company. The NPV and investment cost of these projects is provided. The post explains given this information what technique one should use to screen projects and rank them for selection purpose. The students would be exposed to the usage of Profitability Index through this post.
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- Attached file(s):
- Profitability Index.xls
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