Question

1. The treasurer of Amaro Canned Fruits, INC., has projected the cash flows of projects A, B, and C as follows

Year	Project A	Project B	Project C
1	-100,000	-200,000	-150,000
2	60,000	130,000	110,000
3	60,000	130,000	110,000

Suppose the cost of capital is 10 percent and Amaro’s budget for these projects is $ 300,000. The projects are not divisible. Which project(s) should Amaro accept?

Answer 1

NPV of the projects can be calculated using the formula:

Project A

C₁ = -100000, C₂ = 60000, C₃ = 60000

r = 10%

NPV_A = -90909.1 + 49586.78 + 45078.89 =  3756.574

Period	1	2	3
Cashflow	-100000	60000	60000
Present value	-90909.1	49586.78	45078.89

Project B

C₁ = -200000, C₂ = 130000, C₃ = 130000

r = 10%

NPV_B = -181818 + 107438 + 97670.92 = 23290.76

Period	1	2	3
Cashflow	-200000	130000	130000
Present value	-181818	107438	97670.92

Project C

C₀ = -150000, C₁ = 110000, C₂ = 110000

r = 10%

NPV_C = -136364 + 90909.09 + 82644.63 = 37190.08

Period	1	2	3
Cashflow	-150000	110000	110000
Present value	-136364	90909.09	82644.63

NPV_A = 3756.574, Capital requirement = 100000

NPV_B = 23290.76, Capital requirement = 200000

NPV_C = 37190.08, Capital requirement = 150000

Budget for the projects = 300000 and the projects are not divisible

So, we can choose project A and C as their combined capital requirement is 250000 and their combined NPV is maximum.

Answer -> Amaro should accept project A and C