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 :)
jeff jeffy answered 3 years agoRelated Solutions
The table below lists the projects that your company is considering to invest: Project Payback Period...
The table below lists the projects that your company is
considering to invest:
Project Payback Period (Years) NPV
(USD) IRR (%)
A 4.7 53000 15.44
B 2.1 17000 17.76
C 4.7 18000 16.75
D 4.4 14000 17.05
E 2.8 14000 17.15
The required return is 14.6 percent. Which project should be
accepted if they are mutually exclusive?
E
D
C
B
A
The Capital Budgeting Projects She must choose one of the four capital budgeting projects listed below: ...
The Capital Budgeting Projects
She must choose one of the four capital budgeting projects
listed below:
Table 1
t
A
B
C
D
0
(19,500,000)
(21,000,000)
(16,500,000)
(18,000,000)
1
7,500,000
6,500,000
5,200,000
7,500,000
2
7,500,000
7,200,000
5,200,000
5,800,000
3
5,000,000
8,000,000
6,300,000
4,400,000
4
3,500,000
3,000,000
5,900,000
4,500,000
Risk
Average
Average
High
Low
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A Project
B Project
C
Initial cash outlay
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Cash inflows per
year $1,500,000 $1,800,000 $600,000
Residual
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Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
-$103
28
34
44
53
B
-$103
53
44
34
24
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The cash flows for the two projects are as follows ($
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Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$100
$27
$32
$39
$52
B
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$52
$39
$32
$22
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Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$102
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$31
$39
$49
B
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$49
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Year 1
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Year 4
A
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B
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