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Net Present Value and Project Probability

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17. 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?

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Solution Summary

This solution shows step-by-step calculations of the net present value, project probability index and it ranks the five projects in terms of NPV, PI, and IRR with justifications of preference.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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