Question

Constraints on borrowing.  

Country Farmlands, Inc. is considering the following potential projects for this coming year, but has only $200,000 for these projects: Project A: Cost $60,000, NPV $4,000, and IRR 11% Project B: Cost $78,000, NPV $6,000, and IRR 12% Project C: Cost $38,000, NPV $3,000, and IRR 10% Project D: Cost $41,000, NPV $4,000, and IRR 9% Project E: Cost $56,000, NPV $6,000, and IRR 13% Project F: Cost $29,000, NPV $2,000, and IRR 7% What projects should Farmlands pick?

Answer 1

		W	X	Y	Z=X/W
		Cost	NPV	IRR	NPV/Cost
	PROJECT A	$60,000	$4,000	11%	0.066667
	PROJECT B	$78,000	$6,000	12%	0.076923
	PROJECT C	$38,000	$3,000	10%	0.078947
	PROJECT D	$41,000	$4,000	9%	0.097561
	PROJECT E	$56,000	$6,000	13%	0.107143
	PROJECT F	$29,000	$2,000	7%	0.068966
	The Objective should be to maximize NPV
	Select projects with maximum NPV/Cost
	Arranging Projects in decending order of( NPV/Cost)
		Cost	NPV	IRR	NPV/Cost	Cumulative Cost
	PROJECT E	$56,000	$6,000	13%	0.107143	$56,000
	PROJECT D	$41,000	$4,000	9%	0.097561	$97,000
	PROJECT C	$38,000	$3,000	10%	0.078947	$135,000
	PROJECT B	$78,000	$6,000	12%	0.076923	$213,000
	PROJECT F	$29,000	$2,000	7%	0.068966	$242,000
	PROJECT A	$60,000	$4,000	11%	0.066667	$302,000
		Cost	Cumulative Cost	NPV	Cumulative NPV	IRR
	PROJECT E	$56,000	$56,000	$6,000	$6,000	13%
	PROJECT D	$41,000	$97,000	$4,000	$10,000	9%
	PROJECT C	$38,000	$135,000	$3,000	$13,000	10%
	Funds available	$200,000
	Balanceavailable after allocating for Project E,D and C					$65,000	(200000-135000)
	Out of left out projects of B, F and A,the balance $65000 cannot be sufficient for Project B
	NPV of Project F	$2,000
	NPV of Project A	$4,000
	Project A should be selected tomaximize NPV
	List of Selected Projects are given below
	Selected Projects	Cost	NPV	IRR
	PROJECT A	$60,000	$4,000	11%
	PROJECT C	$38,000	$3,000	10%
	PROJECT D	$41,000	$4,000	9%
	PROJECT E	$56,000	$6,000	13%
	TOTAL	$195,000	$17,000