Question
In: Finance
You have a $10 million capital budget and must make the decision about which investments your...
You have a $10 million capital budget and must make the decision about which investments your firm should accept for the coming year. The firm’s cost of capital is 12 percent. Use the information on the four projects to determine what project(s) your firm should accept on the basis of NPV?
| Project 1 | Project 2 | Project 3 | Project 4 | |
| Initial CF | -4,000,000 | -5,000,000 | -10,000,000 | 5,000,000 |
| Year 1 CF |
1,000,000 |
2,000,000 | 4,000,000 | 2,700,000 |
| Year 2 CF | 2,000,000 | 3,000,000 | 6,000,000 | 2,700,000 |
| Year 3 CF | 3,000,000 | 3,000,000 | 5,000,000 | 2,700,000 |
A) Projects 3, 4
B) Projects 1, 2
C) Project 3
D) Projects 2, 4
Please cross reference https://www.chegg.com/homework-help/questions-and-answers/10-million-capital-budget-must-make-decision-investments-firm-accept-coming-year-firm-s-co-q58576072 and https://www.chegg.com/homework-help/questions-and-answers/project-1-project-2-project-3-project-4-initial-cf-4-000-000-5-000-000-10-000-000-5-000-00-q58583555 before you finalize your answer
Solutions
Expert Solution
Correct Answer is option D
NPV = Pv value of inflow -
outflow
Pv of inflow is calculated in excel
=Pv(rate,nper,pmt,fv)
| Discount rate | 12% | |||||||
| Project 1 | Project 2 | Project 3 | Project 4 | |||||
| Year | Cashflow | Pv of cashhflow | Cashflow | Pv of cashhflow | Cashflow | Pv of cashhflow | Cashflow | Pv of cashhflow |
| 0 | -4000000 | -4000000 | -5000000 | -5000000 | -10000000 | -10000000 | -5000000 | -50,00,000.00 |
| 1 | 1000000 | 892857.1429 | 2000000 | 1785714.286 | 4000000 | 3571428.571 | 2700000 | 2410714.29 |
| 2 | 2000000 | 1594387.755 | 3000000 | 2391581.633 | 6000000 | 4783163.265 | 2700000 | 2152423.47 |
| 3 | 3000000 | 2135340.743 | 3000000 | 2135340.743 | 5000000 | 3558901.239 | 2700000 | 1921806.67 |
| NPV | 622585.6414 | NPV | 1312636.662 | NPV | 1913493.076 | NPV | 1484944.24 |
|
NPV of Project Project 1 |
6,22,585.64 |
| Project 2 | 13,12,636.66 |
| Project 3 | 19,13,493.08 |
| Project 4 | 1484944.424 |
| Highest NPV(Under 10million) | Project 4 + Project 2 |
|
|
| Project 4 + Project 1 |
|
||
| Project 3 | 19,13,493.08 | ||
| Project 2 + Project 1 | 19,35,222.30 |
I hope this clear your doubt.
Feel free to comment if you still have any query or need something else. I'll help asap.
Do give a thumbs up if you find this help
jeff jeffy answered 2 years agoRelated Solutions
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