The following table gives the available projects (in $millions) for a firm. A B C D...

The following table gives the available projects (in $millions) for a firm.

A	B	C	D	E	F	G
90	20	60	50	150	40	20	Initial investment
140	70	65	−10	30	32	10	NPV

If the firm has a limit of $210 million to invest, what is the maximum NPV the company can obtain?

Explain how you decided to prioritize the projects (i.e. use Profitability Index or just reference NPV)

Solutions

Expert Solution

Projects will be chosen on the decreasing order of NPV till it reaches the investment limit of $ 210 million. NPV provides the highest value addition to the shareholders.

Project A will be chosen first as its NPV is highest - So investment = $ 90 M - NPV = 140

Project B will be the next - Cumulative investment = 90+20 =110, NPV = 70

Project C is next, Cumulative investment = 90+20+60 = 170, NPV = 65

Project F is next, Cumulative investment = 90+20+60 + 40 = 210 M , NPV = 32

As the cumulative investment reaches the limit, the above projects are chosen ie Project A,B,C and F

Maximum NPV = 140 + 70+ 65 + 32 = $ 307 M

jeff jeffy answered 2 years ago

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