# 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.

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