You have four project seeking approval. Each costs $1,000. Which three do you choose to fund...
You have four project seeking approval. Each costs $1,000. Which three do you choose to fund if your capital budget is $3,000?
Project A B C D
NPV $250 $150 $175 $200
Discount Rate 13% 7% 7% 10%
Project Life (years) 12 3 5 7
| ABC |
| ABD |
| ACD |
| BCD |
Homework Answers
Capital rationing is a process of allocating the capital to projects which yield the highest return.
Now, when we are comparing these four projects , Project A ,B ,C and D.
The projects with the highest NPV, are Projects A, C and D.
Since, we have $3000, we can choose to spend it on the 3 best projects. Hence, we should go for projects A, C and D.
So, the correct option is option C.
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