The management of Edelmann Corporation is considering the following three investment projects: Rank the projects according to the profitability index, from most profitable to least profitable.

Question

The management of Edelmann Corporation is considering the following three investment projects:  Rank the projects according to the profitability index, from most profitable to least profitable.

Quizplus · Accepted Answer

The profitability index is calculated as the present value of cash inflows divided by the initial investment.

For project R: 
Present value of cash inflows = $15,000 + $7,000 = $22,000 
Profitability index = $22,000 / $20,000 = 1.1

For project S: 
Present value of cash inflows = $14,000 + $10,000 = $24,000 
Profitability index = $24,000 / $22,000 = 1.09

For project T: 
Present value of cash inflows = $18,000 + $14,000 = $32,000 
Profitability index = $32,000 / $30,000 = 1.07

Therefore, the projects ranked from most profitable to least profitable based on their profitability index are S, R, and T. Therefore, the best choice is option C.

The Management of Edelmann Corporation Is Considering the Following Three