Ranking Investment Alternatives
Provide 1 response to each student post. Each response should be 150 words each. Turnitin is being used to check for plagiarism and Please use APA format.
Anna Williams
XXXXXXXXXXThursday Apr 18 at 1:41am
Ranking Investment Alternatives
| Project | Net Investment | NPV | Profitability Index |
| A | $200,000 | $22,000 | 1.11 |
| B | $275,000 | $21,000 | 1.08 |
| C | $150,000 | $6,000 | 1.04 |
| D | $190,000 | -$19,000 | 0.90 |
| E | $500,000 | $40,000 | 1.08 |
| F | $250,000 | $30,000 | 1.12 |
| G | $100,000 | $7,000 | 1.07 |
| H | $200,000 | $18,000 | 1.09 |
| I | $210,000 | $4,000 | 1.02 |
| J | $250,000 | $35,000 | 1.14 |
In your response, complete the following:
- Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?
According to Schneider (2017), “An extension of the net present value method is the profitability index. It is found by dividing the present value of a project’s net cash inflows by its net initial investment. The resulting ratio is cash in to cash out. The higher the ratio is, the more attractive the investment becomes” (p.420). Considering the limit on funds available, we’d want to choose the projects that would appear to be most desirable. In order to do so we want consider the most positive net present value with also a favorably low investment amount. Most of the time, it is the projects that have the highest profitability index that get chosen (Schneider, XXXXXXXXXXIf I choose the projects based on the highest profitability index, then I would have to choose in the following order: J, F, A, H, B, E. This six projects should be accepted first.
- Using the NPV, which projects should be accepted, considering the limit on funds available?
Figuring out which projects should be accepted using the NPV considering the limit on funds available is easy. We know this because Schneider XXXXXXXXXXadvises that, “Net present value is the difference between the present value of the incremental net cash inflows and the incremental investment cash outflows. If net present value is zero or positive, the project is acceptable because the project is earning the acceptable rate of return” (p.418). Thus, we would want to accept projects E, J, F and A.
- If the available investment funds are reduced to only $1,000,000:
- Does the list of accepted projects change from Part 2?
In my opinion, if the available investment funds are reduced to only $1,000,000 then the list of accepted projects will definitely change from Part 2 as there is no longer a sufficient amount of funds in the budget to accept all of the projects with the highest profitability index since we are only working with $1.2 million.
- What is the opportunity cost of the eliminated $200,000?
According to the chart above project A is the one listed with a net investment mount of $200,000. Because the NPV of project A is in fact $22,000 according to the chart, then that would be considered the opportunity cost. Since the investment funds have been reduced to only $1,000,000 then the pool of projects that can be accepted shrinks greatly leaving only a few projects that can now be considered.
References
Schneider, A XXXXXXXXXXManagerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
Brandy Havens
XXXXXXXXXX:30am Apr 24 at 9:30am
Hi Marcus. You did well computing the profitability index for each project! This can be quite helpful when management is trying to evaluate multiple projects at once.
Team, can you think of any reasons why management might select a project with a lower profitability index compared with other options?