Question

3. You are the owner of an investment firm, You Corp. To increase profits you begin considering seven capital investment proposals but are limited to a maximum of$12 million. The projects are independent and have the following costs and profitability indexes associated with them: Profitability of Future Project Cost Index Cash Flows NPV A $4,000,000 1.18 $4,720,000 $720,000 3,000,000 1.08 3,240,000 240,000 C 5,000,000 1.33 6,650,000 1,650,000 D 6,000,000 1.31 7,860,000 1,860,000 4,000,000 1.19 4,760,000 760,000 6,000,000 7,200,000 1,200,000 720,000 4,000,000 1.18 4,720,000 A) Under strict capital rationing, what projects should you select? Why?

Answer 1

Here is solution of your question. If doubt please discuss.All the best

Ang - Capital avculable with you. Coxp_for investment proporculaire limilēd to a maximum of $12.M. -se Available_ capiteil12 Million To_Capital Rationing, Lobile: selecting independent projects, those projects are selected that yield a positive NPV ocpIL Profitabilily Index) more than 1, those projects are financially viable & acceptable. Here is the question, all NPV are positive, so we will consider the project with highest NPV in order to maximize wealth as well as select project with highert PI Index. Given in quation: - Project -c PI 1.33 _ NPV - 1,650,000 Levech. D _PI - 1.31. NPV - 1866.000 are highest among proposed capital of Project C & A PI & NPV all project & it is under 42 Million au C - 5,000,000 be for 200,000 11,000,000 L So I select Project ( l D.