Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:
A B C D E
Present value of . . . . . . . $24,000 $44,000 $15,000 $30,000 $50,000
net cash inflows . . . . . . 20,000 40,000 16,000 24,000 41,000
1. Determine the net present value and the profitability index for each project.
2. Which projects are acceptable using the profitability index as a screening tool?
3. What would be the ranking of the acceptable projects according to the profitability indexes?
4. Interpretive Question: What additional information would be needed to screen and rank the
projects using the internal rate of return method? What are the decision rules using the IRR
method for screening and ranking capital budgeting projects?
This solution provides an Excel file containing the calculations of the net present value and the profitability index.