Problem: Oxford Company has limited funds available for investment and must ration the funds among five competing projects. Selected information on the five projects follows:
|
Project
|
Investment Required
|
Net Present Value
|
Life of the Project (years)
|
Internal Rate of Return (percent)
|
|
A
|
$160,000
|
$44,323
|
7
|
18%
|
|
B
|
$135,000
|
$42,000
|
12
|
16%
|
|
C
|
$100,000
|
$35,035
|
7
|
20%
|
|
D
|
$175,000
|
$38,136
|
3
|
22%
|
|
E
|
$150,000
|
$(8,696)
|
6
|
8%
|
The net present values have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.
(A) Compute the project probability index for each project.
(B) In order of preference, rank the five projects in terms of :
a. Net Present Value
b. Project Probability Index
c. Internal Rate of Return
(C) Which ranking do you prefer? Why?