Problem: Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:
|
|
|
|
Project |
|
|
| |
|
A |
B |
C |
D |
E |
|
|
|
|
|
|
|
| Present value of |
. . . . . . . |
$24,000 |
$44,000 |
$15,000 |
$30,000 |
$50,000 |
| net cash inflows |
. . . . . . |
20,000 |
40,000 |
16,000 |
24,000 |
41,000 |
| Investment cost |
|
|
|
|
|
|
Required to complete:
Problem 1. Determine the net present value and the profitability index for each project.
Problem 2. Which projects are acceptable using the profitability index as a screening tool?
Problem 3. What would be the ranking of the acceptable projects according to the profitability indexes?
Problem 4. Interpretive Question: What additional information would be needed to screen and rank the projects using the internal rate of return method? What are the decision rules using the IRR method for screening and ranking capital budgeting projects?