Motorflex company has limited available capital and is considering investing in

Question

Motorflex company has limited available capital and is considering investing in the projects detailed in the following table. The company has $600,000 available in cash to invest in projects, but also has another constraint with respect to the personnel that it must mobilize to carry out these projects. Note that here the profitability index is calculated as Profitability Index = NPV÷ Investment a) Which project should the company invest in and in what order? Make sure that the company uses up all of the available cash resources. Briefly explain your result. b) What is the total NPV of all projects chosen?

Profitability NPV Rank Proiect Investment 135,000 200,000 125,000 150,000 175,000 75,000 80,000 200,000 50,000 Index 6,000 0.0444 30,000 0.1500 20,000 0.1600 2,000 0.0133 10,000 0.0571 10,000 0.1333 9,000 0,1125 20,000 0.1000 4,000 0.8000 4

Explanation / Answer

(a)

Company will invest in following projects as per given order;

(b)

Total NPV of all projects chosen =

(20000 + 30000 + 10000 + 9000 + 4000) = $73000

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