In: Finance
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 |
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 :)