Assignment Print View 2021-04-08, 1:41 PM
Score: 50/50 Points 100 %
3. Award: 10 out of 10.00 points
Oxford Company has limited funds available for investment and must ration the funds among five
competing projects. Selected information on the five projects follows:
Net Life of the
Investment Present Project
Project Required Value (years)
A $ 500,000 $ 155,000 7
B 603,000 132,000 12
C 346,000 111,300 7
D 653,000 103,100 3
E 644,000 (28,500) 6
The net present values above have been computed using a 10% discount rate. The company
wants your assistance in determining which project to accept first, which to accept second, and so
on.
Required:
1. Compute the profitability index for each project. (Round your answers to 2 decimal places.)
Profitability
Project
Index
A 1.31 !
B 1.22 !
C 1.32 !
D 1.16 !
E 0.96 !
2. In order of preference, rank the five projects in terms of (a) net present value, (b) profitability
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Assignment Print View 2021-04-08, 1:41 PM
index.
Net Present Profitability
Value Index
First A C
! !
preference
Second B A
! !
preference
Third C B
! !
preference
Fourth D D
! !
preference
Fifth E E
! !
preference
3. This part of the question is not part of your Connect assignment.
References
Worksheet Learning Objective:
10-02 Understand
and apply
alternative methods
to analyze capital
investments.
Oxford Company has limited funds available for investment and must ration the funds among five
competing projects. Selected information on the five projects follows:
Net Life of the
Investment Present Project
Project Required Value (years)
A $ 500,000 $ 155,000 7
B 603,000 132,000 12
C 346,000 111,300 7
D 653,000 103,100 3
E 644,000 (28,500) 6
The net present values above have been computed using a 10% discount rate. The company
wants your assistance in determining which project to accept first, which to accept second, and so
on.
Required:
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Assignment Print View 2021-04-08, 1:41 PM
1. Compute the profitability index for each project. (Round your answers to 2 decimal places.)
Profitability
Project
Index
A 1.31
B 1.22
C 1.32
D 1.16
E 0.96
2. In order of preference, rank the five projects in terms of (a) net present value, (b) profitability
index.
3. This part of the question is not part of your Connect assignment.
Explanation:
1.
The formula for the profitability index is:
Present value of cash inflows
Profitability index =
Investment required
The profitability index for each project would be:
Project A: $500,000 + $155,000 = $655,000; $655,000 ÷ $500,000 = 1.31
Project B: $603,000 + $132,000 = $735,000;
$735,000 ÷ $603,000 = 1.22
Project C: $346,000 + $111,300 = $457,300;
$457,300 ÷ $346,000 = 1.32
Project D: $653,000 + $103,100 = $756,100;
$756,100 ÷ $653,000 = 1.16
Project E: $644,000 + $(28,500) = $615,500;
$615,500 ÷ $644,000 = 0.96
Note that investment required + NPV of project = PV of cash inflows.
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Assignment Print View 2021-04-08, 1:41 PM
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