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Chapter 8-4

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:

	Project Number
	1				2				3				4
Investment required	$	(450,000	)		$	(400,000	)		$	(300,000	)		$	(420,000	)
Present value of cash inflows at a 10% discount rate		584,550				482,460				324,750				533,500
Net present value	$	134,550			$	82,460			$	24,750			$	113,500
Life of the project		11 years				22 years				11 years				8 years
Internal rate of return		16	%			13	%			12	%			17	%

Because the companys 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 cant accept all of the available projects.

Required:

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

Project	Profitability Index
1
2
3
4

2. Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

	Net Present Value	Project Profitability Index	Internal Rate of Return
First preference
Second preference
Third preference
Fourth preference

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