Using Profitability (PI) Index for Project screening
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Sunshine Corporation is considering several long-term investments. Management wants to
accept the two best projects, given the following data:
Project
A B C D E
Present value of
net cash inflows . . . . . . . . $24,000 $44,000 $15,000 $30,000 $50,000
Investment cost . . . . . . . . . . 20,000 40,000 16,000 24,000 41,000
Required:
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?
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Solution Summary
The problem answers step-by-step how we can use PI to screen projects when we are given a set a projects to choose from. In a situation what is the correct project evaluation technique to rank these projects. Is it simply NPV or should we use PI. It also explains why IRR could not be used in this case.
Solution Preview
Project
A B C D E
Present value of
net cash inflows . . . . . . . . $24,000 $44,000 $15,000 $30,000 $50,000
Investment cost . . . . . . . . . . 20,000 40,000 16,000 24,000 ...
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