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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

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    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