Option #1: Capital Rationing Table with Cash Flows for 5 projects. Project A Project B Project...
Option #1: Capital Rationing
Table with Cash Flows for 5 projects.
| Project A | Project B | Project C | Project D | Project E | |
| Initial Investment | -$100,000 | -$25,000 | -$40,000 | -$10,000 | -$150,000 |
| Year 1 | $50,000 | $15,000 | $20,000 | $7,000 | $100,000 |
| Year 2 | $40,000 | $10,000 | $15,000 | $4,000 | $25,000 |
| Year 3 | $20,000 | $5,000 | $5,000 | $2,000 | $10,000 |
| Year 4 | $10,000 | $1,000 | $5,000 | $1,000 | $10,000 |
| Year 5 | $1,000 | $10,000 | |||
| Year 6 | $1,000 | $10,000 |
- Calculate the IRR for each of the projects presented. Rank the projects based on their IRR.
- Graph the projects on an Investment Opportunity Schedule (interest rate on the vertical axis and initial investment on the horizontal). Suppose the firm has a capital rationing amount of $170,000 and a required rate of return of 10%.
- Which projects should the firm implement based on your analysis using the IRR approach above? Write an email to your CFO explaining your rationale proving the choices based on the considerations of shareholder value and the maximum investment budget.
Homework Answers
a)
Hence, project D has the highest IRR. Ranking of all other project are given below:
| Project | Initial Investment | IRR | Rank |
| D | -10000 | 21.83% | 1 |
| B | -25000 | 16.01% | 2 |
| A | -100000 | 10.22% | 3 |
| C | -40000 | 6.54% | 4 |
| E | -150000 | 5.03% | 5 |
b)
3. Hence, project D should be
implemented by your firm.
Hi XYZ,
We have calculated IRR for project A,B,C,D &E. Below is the result for our analysis:
| Project | Initial Investment | IRR | Rank |
| D | -10000 | 21.83% | 1 |
| B | -25000 | 16.01% | 2 |
| A | -100000 | 10.22% | 3 |
| C | -40000 | 6.54% | 4 |
| E | -150000 | 5.03% | 5 |
As project D has the highest IRR, it has the highest return and also, the investment is also lowest for this project. We should implement project D to maximize shareholders wealth.
Regards,
ABC
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Option #1: Capital Rationing
Table with Cash Flows for 5 projects.
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rank each by IRR. If the firm’s capital budget is $75,000, which
projects will be funded? What will the firm’s MARR be?
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