Question

The group of highest PI projects spending as much of the $750 million as possible and resulting in the highest collective NPV: Accept B and D. Show formulas used.

Project	ICO (millions)	NPV (millions)	PI
B	500	$125	1.25
C	400	90	1.23
A	$100	20	1.20
D	250	40	1.16

Answer 1

The formula for PI is :

NPV + initial investment/ initial investment

If the PI is greater than 1,then the project should be accepted.

The formula for NPV is ,

(Initial investment ) + present value of cash flows of the project

If the NPV is positive ,then the project should be accepted if thr NPV is negative then the proejct should be rejected.

The projects with the highest NPV is B and second highest is C ,due to budget constraints we cannot accept B and C ,so we accept B and D which has the highest NPV after proejct B. similarly the PI ratios are highest for B and C ,due to budget constraints we select B and D.