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

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