Imperial Systems has $1 million available for capital investments during the current year.
A list of possible investment projects, together with their net investments and net present
values, is provided in the following table:
Profitability Index: NPV + IO / IO
1. 1.10 > 1 Accept!
2.1.082 > 1 Accept!
3. 1.218 > Accept!
4. 1.033 > 1 Accept!
5. 1.08 > 1 Accept!
6. 1.04 > 1 Accept!
7. 1.08 > 1 Accept!
8. 0.91 < 1! Deny!
Rank of Profitability Index:
3
1
2
7 and 5
6
4
8
b. The projects selected = Project 3 + Project 1 + Project 2
Fund spent = $275,000 + $200,000 + $500,000 = $975,000, Total NPV is $121,000
Unspent fund = $100,0000 – $975,000 = $25,000