Shaylee Corp has $2.25 million to invest in new projects. The company’s managers

Question

Shaylee Corp has $2.25 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows:

  
Required:
1. Is Shaylee able to invest in all of these projects simultaneously?

  

2-a. Calculate the profitability index for each project. (Round your answers to 4 decimal places.)



2-b. What is Shaylee's order of preference based on the profitability index?

Project A Project B Project C Project D Initial investment $ 590,000 $ 270,000 $ 830,000 $ 985,000 Present value of future cash flows 805,000 435,000 1,240,000 1,600,000

Explanation / Answer

Req 1. Total Investment requird for all Projects: Project A 590000 Project B 270000 Project C 830000 Project D 985000 Total Investment required 2675000 Total investment required is $ 2.675 mllion and investment in hand is $ 2.25 million, hence the company cannot invest in all projects. Req 2: A B C D Present value of Cash flows 805000 435000 1240000 1600000 Divide: Initial Investment 590000 270000 830000 985000 Profitability Index 1.36 1.61 1.49 1.62 (Present value of inflows/ Initial Investment) Req 2-b: Preference order Project First Project D Second Project B Third Project C Fourth Project A

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