(Ignore income taxes in this problem. )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

(Ignore income taxes in this problem. )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 for each project is calculated as follows:

Project T: Present value of cash inflows ($3,200) / Initial investment ($2,800) = 1.14 
Project R: Present value of cash inflows ($2,800) / Initial investment ($2,500) = 1.12 
Project S: Present value of cash inflows ($1,800) / Initial investment ($2,000) = 0.9

The profitability index ranks the projects in order of the amount of present value of cash inflows earned per dollar of initial investment. Therefore, the most profitable project is the one with the highest profitability index, which is project T with a value of 1.14. The second most profitable project is project R with a value of 1.12, and the least profitable project is project S with a value of 0.9. Therefore, the best choice is C because it correctly ranks the projects in order of increasing profitability index.

(Ignore Income Taxes in This Problem