Question

(a) What would the company’s budget need to be to fund all 7 projects?

(b) What projects would be funded if the company could get a return on its money of 15% through other means?

(c) What other, non-financial factors, might lead the company to decide to fund one or more of the projects with lower rates of return?

Project $0 N (years) First Cost $10,000 $20,000 $30,000 $40,000 $35,000 $25,000 $20,000 Annual Benefits Salvage Value $2,500 $3,500 $5,000 $3,600 $3,000 $4,500 $10,000 $4,000 $5,000 $5,000 $3,000 $4,200 $10,000

Answer 1

(a): To fund all 7 projects the company will need an amount = sum of all first costs i.e. the initial investment. Thus amount = 10000+20000+30000+40000+35000+25000+20000

= $180,000

(b): Here hurdle rate is 15% and we will determine IRR of all the projects using a trial and error approach. It should be noted that IRR is the rate which makes the NPV as nil.

	IRR
Project 1	21.41%
Project 2	13.53%
Project 3	10.27%
Project 4	9.93%
Project 5	8.36%
Project 6	18.63%
Project 7	18.97%

Thus projects 1, 6 and 7 will be funded as the rate of return for these projects are greater than 15%.

IRR computation for project 1 is shown below for your reference. In the same manner IRR of all other projects were computed:

Year	Cash flow	IRR	1+r	PV = Cash flow/(1+r)^n	Type of flow
0	- 10,000.00	21.41%	1.214065	-                              10,000.00	First cost
1	2,500.00			2,059.20	Annual benefits
2	2,500.00			1,696.12	Annual benefits
3	2,500.00			1,397.06	Annual benefits
4	2,500.00			1,150.73	Annual benefits
5	2,500.00			947.83	Annual benefits
6	2,500.00			780.71	Annual benefits
7	2,500.00			643.05	Annual benefits
8	2,500.00			529.67	Annual benefits
9	2,500.00			436.28	Annual benefits
10	2,500.00			359.35	Annual benefits
10	0			-	Salvage value
			NPV	0.00

(c):  Other non-financial factors that might lead the company to decide to fund one or more of the projects with lower rate of return are factors like need for technical superiority in terms of flexibility and adaptability, operational considerations and servicing arrangements. There could be other factors like matching industry standards and good practice, staff motivation, climatic and environmental factors, and customer satisfaction levels.