Question

In: Finance

You are considering the projects listed in the table below. Your company is currently capital constrained...

You are considering the projects listed in the table below. Your company is currently capital constrained and cannot afford to spend more than a total of $1,200,000 on the projects. Which combination of projects do you recommend that the company take?

Cost

NPV

Project 1

$235,000

$72,000

Project 2

$125,000

$22,365

Project 3

$540,000

$70,235

Project 4

$450,000

$105,983

Project 5

$50,000

$16,874

Project 6

$121,000

$20,584

Project 7

$251,000

$55,451

Project 8

$95,000

$20,784

Solutions

Expert Solution

Capital Contraint = $1,200,000.

If there is constraint on Capital, Profitability Index is best way to rank the projects.

We will use Profitability Index Analysis for selecting the projects

Profitability Index = PV of inflows / PV of outflows

Calculating Profitability Index for the projects:

Project Cost NPV PV of Inflows
Cost + NPV
Profitability Index Ranking

Cost for selected projects

Project 1 235,000.00 72,000.00 307,000.00 1.306 2 235,000.00
Project 2 125,000.00 22,365.00 147,365.00 1.179 7
Project 3 540,000.00 70,235.00 610,235.00 1.130 3 540,000.00
Project 4 450,000.00 105,983.00 555,983.00 1.236 4
Project 5 50,000.00 16,874.00 66,874.00 1.337 1 50,000.00
Project 6 121,000.00 20,584.00 141,584.00 1.170 8
Project 7 251,000.00 55,451.00 306,451.00 1.221 5 251,000.00
Project 8 95,000.00 20,784.00 115,784.00 1.219 6 95,000.00
1,171,000.00

Please note that we cannot select project 4. Because if we select project 4 after project 3, capital requirement will be 1,275,000.

So, we preferred to select next best projects.

Thumbs up please if satisfied. Thanks :)


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