Question

The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm's cost of capital is 14 percent. It will invest only $73,600 this year. It has determined the IRR for each of the following projects:

Project	Project Size	Internal Rate of Return
A	$10,900	14.0%
B	25,900	15.0
C	25,900	16.0
D	10,900	17.0
E	10,900	11.0
F	20,900	19.0
G	15,900	21.0

a. Pick out the projects that the firm should accept. (You may select more than one answer. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.)

• Project Bunanswered
• Project Aunanswered
• Project Dchecked
• Project Fchecked
• Project Gchecked
• Project Eunanswered
• Project Cchecked

b. If projects C and G are mutually exclusive, how would that affect your overall answer? That is, which projects would you accept in spending the $73,600? (You may select more than one answer. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.)

• Project Bchecked
• Project Aunanswered
• Project Fchecked
• Project Cunchecked
• Project Gchecked
• Project Eunanswered
• Project Dchecked

Answer 1

a)
	Project having higher IRR should give the priority.
		Project	Cost	Remaing Balance
				73600
		G	15900	57700
		F	20900	36800
		D	10900	25900
		C	25900	0
	Project : G, F,D,C should be accepted.
b)	If project G selected
		Project	Cost	Remaing Balance	IRR	Expected Retun
	a	b	c	d	e	f=c*e
				$                   73,600
		G	$         15,900	$                   57,700	0.21	$              3,339
		F	$         20,900	$                   36,800	0.19	$              3,971
		D	$         10,900	$                   25,900	0.17	$              1,853
		B	$         25,900	$                            -	0.15	$              3,885
		Total	$         73,600			$            13,048
	If project C selected
		Project	Cost	Remaing Balance	IRR	Expected Retun
	a	b	c	d	e	f=c*e
				$                   73,600
		F	$         20,900	$                   52,700	0.19	$              3,971
		D	$         10,900	$                   41,800	0.17	$              1,853
		C	$         25,900	$                   15,900	0.16	$              4,144
		B	$         15,900	$                            -	0.15	$              2,385
		Total	$         73,600			$            12,353
	If project G is selected return on investment would be greater.
	Hence G,F D B should be accepted.