Question

Please Help

As part of a year-end strategy meeting, three projects have been identified as potential investments by head office of Hanna Barbara Inc. The information below 2. gives details of each of the three: Project Libre Project Gemini Project Everest Investment Required (ts 0) Scalable, between $35M $25M | $10M and $50M Depends on Level 2.0M $3.0M NPV of Investment 18.0% 1.20 15.0% IRR 1.12 1.06 Profitability Index Project Libre is scalable in that we can invest anywhere between $10M and $50M. The NPV will depend on the level of investment. Projects Gemini and Everest are mutually exclusive. If Hanna Barbara has ONLY $60M to invest in total, which projects should be selected, how much should be invested? Why? If Hanna Barbara has ONLY $100M to invest in total, which projects should be selected, how much should be invested? Why? If Hanna Barbara has unlimited capital, which projects should be selected, how much should be invested? Why? a. b. c.

Answer 1

He should choose the higher PI first

If investment in Libe is x, NPV=(PI-1)*x=(1.2-1)*x

1.
He will shortlist Libre and Gemini
Investment=25+x
NPV=3+0.2x

Option 1:
Invest 25 in Gemini and 35 in Libre
NPV=3+(1.2-1)*35=10 M

Option 2:
Invest 50 in Libre
NPV=50*(1.2-1)=10

So its better to invest 50M in Libre

2.
Option 1: Invest 40M in Libre, 25M in Gemini and 35M in Everest
NPV=(1.2-1)*40+3+2=13M

Option 2: Invest 50M in Libre, 25M in Gemini
NPV=(1.2-1)*50+3=13M

So its better to invest 75M total with 50M in Libre and 25M in Gemini

3.
As all are positive NPV projects, we should accept all
Investment=50+25+35=110M