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:

exercise-5-cbt-img1

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.

Prev
Next
Show your love for us by sharing our contents.

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

  1. jeniffer

    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.

  2. Rohit

    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

Leave a comment