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 1 year 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
Table 1 shows the expected after-tax operating...
A company is considering three capital budgeting projects. Data relative to each is given below. Each...
A company is considering three capital
budgeting projects. Data relative to each is given below. Each
project has a life of 5 years. The company uses the Net Present
Value (NPV) method to evaluate capital budgeting projects and its
discount rate is 9%.
Project
A Project
B Project
C
Initial cash outlay
(cost) -$5,000,000 -$6,000,000 -$2,500,000
Cash inflows per
year $1,500,000 $1,800,000 $600,000
Residual
value $
500,000 0 $100,000
If the projects are mutually exclusive, which, if any, should
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If the projects are independent, which, if any, should...
Your company is considering an expansion project, with projected cash flows as listed below. The CFO...
Your company is considering an expansion project, with projected
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period. She tells you that she knows there are problems with the
payback criteria, but the discounted payback period remedies these
problems. Use a discount rate of 12%, and a discounted payback
period cutoff of 4 years. Discuss your decision. Year Cash flow 0
$(450,000) 1...
You are considering the following two projects and can take only one. Your cost of capital...
You are considering the following two projects and can take
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projects are as follows ($ million):
Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
-$103
28
34
44
53
B
-$103
53
44
34
24
What is the IRR of each project? Which project should you
choose?
Select one:
a. IRR of Project A = 17.7%, IRR of Project B = 21.7%....
You are considering the following two projects and can take only one. Your cost of capital...
You are considering the following two projects and can take only
one. Your cost of capital is
11.1%.
The cash flows for the two projects are as follows ($
million):
Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$100
$27
$32
$39
$52
B
−$100
$52
$39
$32
$22
a. What is the IRR of each project?
b. What is the NPV of each project at your cost of capital?
c. At what cost of capital...
You are considering the following two projects and can only take one. Your cost of capital...
You are considering the following two projects and can only take
one. Your cost of capital is 11.4 %. The cash flows for the two
projects are as follows ($ million):
Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$102
$27
$31
$39
$49
B
−$102
$49
$39
$31
$20
a. What is the IRR of each project? b. What is the NPV of each
project at your cost of capital? c. At what cost of...
You are considering the following two projects and can only take one. Your cost of capital...
You are considering the following two projects and can only take
one. Your cost of capital is
11.2 %11.2%.
The cash flows for the two projects are as follows ($
million):
Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$100
$27
$30
$42
$52
B
$100
$ 52
$ 42
$ 30
$21
a. What is the IRR of each project?
b. What is the NPV of each project at your cost of capital?
c. At...
Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25...
Your company is currently considering two investment projects.
Each project requires an upfront expenditure of $25 million. You
estimate that the cost of capital is 10% and the investments will
produce the following after tax cash flows:
Year
Project A
Project B
1
$5,000,000
$20,000,000
2
$10,000,000
$10,000,000
3
$15,000,000
$8,000,000
4
$20,000,000
$6,000,000
a) Calculate the payback period for
both projects, then compare to identify which project the firm
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Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows....
Iggy Company is considering three capital expenditure projects.
Relevant data for the projects are as follows.
Project
Investment
Annual
Income
Life of
Project
22A
$240,600
$17,220
6 years
23A
271,400
21,000
9 years
24A
284,100
15,700
7 years
Annual income is constant over the life of the project. Each
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Click here to view the factor table.
(a)
Determine...
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