Question 12.A.6: Ranking Projects Using the PI PROBLEM: You have identified t...
Ranking Projects Using the PI
PROBLEM: You have identified the following seven positive NPV investments for your in-home computer-support business. If you have $50,000 to invest this year, which projects should you accept?
APPROACH: Use the four-step procedure presented in the text to determine which projects you should accept.
Calculating the PI and ranking the projects from highest to lowest PI yields the following:
\begin{matrix} \underline{Project} && \underline{Investment} && \underline{NPV \ @10\%} && \underline{PI} \\ Buy \ new \ tool \ set && \$500 && \$1,000 && \$1,500/\$500=3.000 \\ Buy \ employee \ training \ program && 8,000 && 4,000 && \$12,000/\$8,000=1.500 \\ Paint \ existing \ cars && 4,000 && 2,000 && \$6,000/\$4,000 =1.500 \\ Buy \ used \ car && 12,000 && 4,000 && \$16,000/\$12.000=1.333 \\ Buy \ new \ test \ equipment && 10,000 && 2,000 && \$12,000/\$ 10,000=1.200 \\ Buy \ new \ notebook \ computer && 3,000 && 500 && \$3,500/\$3,000=1.167 \\ Buy \ office \ condo && 40,000 && 5,000 && \$45,000/\$40,000=1.125 \end{matrix}With $50,000 to invest, you should invest in all projects except the office condo. This strategy will require $37,500 and is expected to result in a total NPV of $13,500. The $12,500 that you have left over, which is not enough to buy the office condo, can be held in the business until an appropriate use for the money is identified, or it can be distributed to the stockholder (you).