Question

2. The Vice President of Finance at Kramerica, Inc. has determined a capital investment budget of $8,000,000 for the next year. Unfortunately, this amount is not sufficient to accept all positive NPV projects available to the firm, which are listed in the table below. Region Project Cost NPV Europe 1 $1,200,000 $172,036 Europe 2 $2,000,000 $362,283 Europe 3 $500,000 $147,487 Asia 4 $600,000 $72,076 Asia 5 $700,000 $129,352 Asia 6 $3,000,000 $527,127 Asia 7 $1,500,000 $343,632 Africa 8 $200,000 $52,836 Africa 9 $2,400,000 $275,936 Africa 10 $1,000,000 $175,824 Help the Vice President of Finance to choose which set of investments should be accepted.

a) Using the Solver, determine which projects should be accepted if the firm’s goal is to maximize shareholders wealth, subject to the maximum investment constraint.

b) Now assume that the Vice President of Finance has informed you that the capital budget has been cut to $4,000,000 for the next year, and that at least one project must be accepted for each region. Change your Solver constraints to account for this new information and find the new solution.

c) In addition to the constraints from part b, the Vice President of Finance has now informed you that projects 3, 5, and 8 are mutually exclusive, so, at most, one of them can be selected. Change your Solver constraints to account for this new information and find the new solution.

Can you include formulas in excel? This question wasn't answered because it didn't have enough information but this is the only information given for the problem

Answer 1

Solution:

The solution is provided as under:

We are using solver. The condition is

- We can either do or not do the project i.e. binary. I am attaching the excel screenshots which are self explanatory.

- Note: Look at the constraints carefully.

A] Solution - Do the projects highlighted in RED.

The screenshot of formulas used is as under:

Solution for B]

Do the projects highlighted in RED.

Solution C]

Do the projects as highlighted in RED.

I hope you understand the solution. Thanks.

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