Question

QUESTION 14 A company is considering three independent projects (G, H, and I) that have the following expected cash flows and risk-adjusted discount rates. Project Discount Rate (k) Initial Investment Year 1 Year 2 Year 3 Year 4 Year 5 G 9.0% ($800) $200 $200 $200 $200 $250 H 5.0% ($500) $300 $50 $50 $50 $200 I 7.0% ($400) $90 $120 $150 $100 $50 The company has a budget constraint of $1,000. Based on NPV, which project(s) should the company choose? 1. Project H 2. Projects H and I 3. Project G 4. None

Answer 1

Solution :

The NPV of project G = $ 10.43 ; Initial Investment = $ 800

The NPV of project H = $ 72.10 ; Initial Investment = $ 500

The NPV of project I = $ 23.31   ; Initial Investment = $ 400

Projects H & I have higher NPV when compared to Project G

Thus Project H & I should be chosen.

Also, the company has a budget constraint of $ 1,000. The total Investment of Project H & Project I is = $ 500 + $ 400 = $ 900, which is within the budget constraint of $ 1000.

Based on NPV the company should choose projects H & I

Thus the solution is Option 2. Project H & I.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.