Question

Ten capital spending proposals have been made to the budget committee as the members prepare the annual budget for their firm. Each independent project has a 5-year life and no salvage value.

Project	Initial cost (thousands)	Uniform Annual Benefit (thousands)	Rate of return
A	$10	$2.98	15%
B	$15	$5.58	25%
C	$5	$1.53	16%
D	$20	$5.55	12%
E	$15	$4.37	14%
F	$30	$9.81	19%
G	$25	$7.81	17%
H	$10	$3.49	22%
I	$5	$1.67	20%
J	$10	$3.20	18%

(a) Based on a MARR of 14%, which projects should be approved?

(b) Rank-order all the projects according to desirability.

(c) If only $70,000 is available, which projects should be approved?

(d) Are the results the same if the projects are ranked on IRR? What is the opportunity cost of capital?

Please provide step by step solutions. Good solution = automatic thumbs up!

Answer 1

a) Based on a MARR of 14%, below yellow highlighted project should be approved:

b)

As per above rate of return below is the rank of desirabilty: B, H, I,F, J, G, C, A, E and D

c) If only $70000, is available all the capital should be invested into highest return project i.e. Project B

d)  

As the above IRR calculation below is new rank of projects as per desirability:

Project	IRR
B	25.0%
H	22.0%
I	19.9%
F	19.0%
J	18.0%
G	17.0%
C	16.1%
A	15.0%
E	14.0%
D	12.0%

So, we can see that project ranking based on IRR, is also giving the same result.

Opportunity cost of capital is 14% i.e. MARR