Question

For questions 18-20, please write details and steps. 18. Use the table for the question(s) below. Consider the following list of projects: Project A Investment NPV $135,000 200,000 125,000 150,000 175,000 75,000 80,000 200,000 50,000 $6,000 30,000 20,000 2,000 10,000 10,000 9,000 20,000 4,000 D F G H Assuming that your capital is constrained, which project should you invest in first? And which project should you invest in last? Please explain. If you only have $600,000 available to invest in projects, which project should you invest in and in what order using profitability index method? Why it is not the best choice? If you try to use up the budget $600,000, which project should you invest in and in what order?

please answer all parts of questions and provide step by step solution, thank you.

Answer 1

Profitability Index calculation:

Project	Investment	NPV	Profitability Index (NPV/Investment)	Prioritize from highest index value to lowest
A	$135,000	$6,000	0.044	8
B	$200,000	$30,000	0.150	2
C	$125,000	$20,000	0.160	1
D	$150,000	$2,000	0.013	9
E	$175,000	$10,000	0.057	7
F	$75,000	$10,000	0.133	3
G	$80,000	$9,000	0.113	4
H	$200,000	$20,000	0.100	5
I	$50,000	$4,000	0.080	6

                     

Total capital budget limit or constrain is $600,000

Based on Profitability Index priority; selected projects are –

Project C, B, F & G

Where total investment required = $125,000 + $200,000 + $75,000 + $80,000 = $480,000

This amount is less than the total capital budget limit but we cannot select the next project (Project H) in priority list due to budget constraints

The investment required for project H is $200,000, remaining capital ($600,000 - $480,000 =$120,000) is not sufficient for Project H

Therefore selected projects are –

Priority order	Project
1	C
2	B
3	F
4	G