# Relative Profitability / Screening of Projects

EXERCISE 18-16

California company is trying to determine the relative profitability of two alternative investments. Investment A requires an initial cash outlay of $10,000 and has a net present value of $500. Investment B requires an initial cash outlay of $2,000 and has a net present value of $150. Compute the profitability index of each investment. Which alternative is more profitable?

PRACTICE 18-16

The company is considering eight capital investment projects. The company has a minimum required internal rate of return of 13% Screen and rank the eight capital investment projects using the internal rate of return.

Project Exspected date of return

S 14%

T 24

U 20

V 10

W 17

X 9

Y 12

Z 18

https://brainmass.com/business/capital-budgeting/relative-profitability-screening-of-projects-152009

#### Solution Preview

EXERCISE 18-16

Profitability Index (PI) = 1+ NPV/Initial Investment

For Investment A, PI = 1+500/10,000=1.05

For Investment B, PI = 1+150/2,000 = 1.075

Investment B is more profitable since it has ...

#### Solution Summary

The solution explains how to calculate the relative profitability of projects and how to screen projects based on the return generated by the projects