# Exercise-5 (Present value index – ranking investment projects)

The management of National company is considering three competing investments – investment P, investment Q and investment R. The information about the requirement of initial amount of investment, present value of net cash inflow and net present value of all three investments is given below:

**Required:**

Choose the most desirable proposal using present value index (profitability index).

## Solution:

As each investment requires a different initial investment, the proposals would be ranked using present value index (also called profitability index).

**Present value index = Present value of cash inflows/Initial investment**

**Proposal P:** $36,000/$35,000 = 1.03

**Proposal Q:** $21,000/$20,000 = 1.05

**Proposal R:** $12,000/$11,000 = 1.09

Proposal R is the most desirable proposal because it has the highest present value index.

Next page is: Exercise-6 (Capital budgeting with unequal proposal lives)Prev page is: Exercise-4 (Net present value method – uneven cash flows)

## 2 Comments on Exercise-5 (Present value index – ranking investment projects)

Need help in calculating this quiz.

angola company has six projects available for investment as follows.

project initial cost sh’m’ Npv@ 15% cost of cap.

1 60 21

2 15 9

3 20 9

4 55 15

5 30 20

6 40 -2

the firm has sh.100m available for investment. identify which project should be undertaken. using PI and NPV.

PvP factor 20% Korma hoga

31300 initial outlay h or invest amount 100000 h reply fast mera ‘kl paper h

annual cash flow 6000 h