Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: $\begin{array}{c}
\begin{array}{c}
\underline{\text { Project} } \
1 \
2 \
3 \
4
\end{array}
\begin{array}{c}
\underline{\text { Investment }} \
\$ 125,000 \
150,000 \
75,000 \
112,500
\end{array}
\begin{array}{c}
\underline{\text { Net Present Value }} \
\$ 62,500 \
45,000 \
52,500 \
45,000
\end{array}
\end{array}$
Use the profitability index to rank these investments in terms of preference.

Question

Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: $\begin{array}{c}
\begin{array}{c}
\underline{\text { Project} } \
 1 \
2 \
3 \
4
\end{array}
\begin{array}{c}
\underline{\text { Investment }} \
 \$ 125,000 \
150,000 \
75,000 \
112,500 
\end{array}
\begin{array}{c}
\underline{\text { Net Present Value }} \
 \$ 62,500 \
45,000 \
52,500 \
45,000 
\end{array}
\end{array}$
 Use the profitability index to rank these investments in terms of preference.

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the net present value (NPV) of a project by the initial investment. The rankings are as follows: Project 1: 62,500 / 125,000 = 0.5, Project 2: 45,000 / 150,000 = 0.3, Project 3: 52,500 / 75,000 = 0.7, Project 4: 45,000 / 112,500 = 0.4. Thus, the preference order based on the highest to lowest PI is Project 3, 1, 4, 2.

Hewitt Ltd Has Chosen Four Potential Investment Projects Use the Profitability Index to Rank These Investments in Terms