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# Relative Profitability / Screening of Projects

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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

#### 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

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