Rank the projects according to the profitability index, from most profitable to least profitable.

A) Y, W, X
B) X, Y, W
C) X, W, Y
D) W, Y, X

According to the profitability index, the projects are ranked from highest to lowest based on the present value of each project's future cash flows divided by the initial investment.

The profitability index for project X is (PV of Future Cash Flows / Initial Investment) = [(120,000 + 90,000 + 60,000) / 200,000] = 1.35
The profitability index for project Y is (PV of Future Cash Flows / Initial Investment) = [(84,000 + 70,000 + 56,000) / 120,000] = 1.25
The profitability index for project W is (PV of Future Cash Flows / Initial Investment) = [(40,000 + 50,000 + 60,000) / 100,000] = 1.5

Therefore, project W has the highest profitability index and is the most profitable. Project Y has the second-highest profitability index and project X has the lowest profitability index.

Choice C has the order of projects based on their profitability index from highest to lowest, making it the best choice.

Reference: CH12-Ref19
(Ignore income taxes in this problem.)Eddie Corporation is considering the following three investment projects: