(Ignore income taxes in this problem. )The management of Dittrick 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 Dittrick 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 by dividing the present value of future cash flows by the initial investment. Using this formula, we get:

Project I: $478,000/$400,000 = 1.195
Project J: $714,000/$600,000 = 1.19
Project K: $510,000/$450,000 = 1.133

Therefore, the ranking of projects according to profitability index is J, I, K.

The best choice would be to invest in Project J as it has the highest profitability index and will generate the highest return on investment.

(Ignore Income Taxes in This Problem