Which projects are acceptable using the profitability index


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
net cash inflows . . . . . . . . $24,000 $44,000 $15,000 $30,000 $50,000
Investment cost . . . . . . . . . . 20,000 40,000 16,000 24,000 41,000

Required:

1. Determine the net present value and the profitability index for each project.

2. Which projects are acceptable using the profitability index as a screening tool?

3. What would be the ranking of the acceptable projects according to the profitability indexes?

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?

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Finance Basics: Which projects are acceptable using the profitability index
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