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7 January, 09:23

Information on four investment proposals is given below: Investment Proposal A B C D Investment required $ (790,000) $ (120,000) $ (120,000) $ (1,820,000) Present value of cash inflows 1,121,300 168,300 182,000 2,427,200 Net present value $ 331,300 $ 48,300 $ 62,000 $ 607,200 Life of the project 5 years 7 years 6 years 6 year

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  1. 7 January, 09:31
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    1. The formula to compute the profitability index is shown below:

    Profitability index = Net present value : investment required

    For Proposal A, it would be

    = $331,300 : $790,000

    = 0.42

    For Proposal B, it would be

    = $48,300 : $120,000

    = 0.40

    For Proposal C, it would be

    = $62,000 : $120,000

    = 0.52

    For Proposal D, it would be

    = $607,200 : $1,820,000

    = 0.33

    2. The proposal rank preference is shown below:

    Proposal Profitability index Rank

    A 0.42 Second

    B 0.40 Third

    C 0.52 First

    D 0.33 fourth

    So, it would be C, A, B and D
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