net present value.b. project profitability index.c. internal rate of return.d. payback period.e. accounting rate of return.

project profitability

E12-37A (similar to)Question Help  

The following table contains information about four projects in which Carlos Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about their potential project.LOADING…​(Click the icon to view the projects​ information.)Requirements

1.Rank the four projects in order of preference by using the
a. net present value.b. project profitability index.c. internal rate of return.d. payback period.e. accounting rate of return.
2.Which​ method(s) do you think is best for evaluating capital investment projects in​ general? Why?

Requirement 1. Rank the projects in order of preference.

 (a)
 Net Present
 Value
1st preferredC
2nd preferredD
3rd preferredB
4th preferredA
(b)
Profitability
Index
A
B
C
D
(c)
Internal Rate
of Return
B
A
C
D
(d)
Payback
Period
C
A
B
D
(e)
Accounting Rate
of Return
D
A
B
C

Requirement 2. Select the method that corresponds to the appropriate explanation.Net present value (NPV)​: This method indicates profitability by comparing the present value of the​ investment’s net cash inflows with the cost of the investment​ (already stated at its present​ value). This method is superior because it incorporates the time value of money. Profitability index​: This method helps to compare the NPV across alternative investments of varying sizes.Internal rate of return​: This method also indicates profitability and incorporates the time value of money. This method will show us the actual rate of return being earned on the investment by equating the present value of the net cash inflows to the​ investment’s cost. In other​ words, it is the interest rate which brings the​ investment’s NPV to zero.Payback period​: This method will show the company how quickly it recoups its initial investment. This method will be good for screening out those potential investments that are too risky because the period is too long.​ However, the period will not be the sole criterion for accepting capital investments since it does not give the company any insight about the​ investment’s profitability.​ Additionally, it does not incorporate the time value of money.Accounting rate of return (ARR)​: This method will give the company an indication of how profitable the investment will be.​ However, since it does not consider the time value of​ money, it is not the best indicator of profitability. This method is the only method that uses accrual accounting figures. Therefore it will help the company assess the impact of investments on the financial statements. The other methods use net cash flows.

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