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 $4,000,000 1.18 $4,720,000 $ 720,000 3,000,000 1.08 3,240,000 240,000 5,000,000 1.33 6,650,000 1,650,000 6,000,000 1.31 7,860,000 1,860,000 4,000,000 1.19 4,760,000 760,000 6,000,000 1.20 7,200,000 1,200,000 1.18 720,000 4,000,000 4,720,000 A) Under strict capital rationing, what projects should you select? Why?

Answer 1

We begin with highest PI first and go down till the budget is exhausted

We select C, D and investment required is 5+6=11 million