3. The Cooper Electronics Company has developed the following schedule of potent

Question

3. The Cooper Electronics Company has developed the following schedule of potential investment projects that may be undertaken during the next six months:

Project Cost (in Millions of Dollars) Expected Rate of Return
A $ 3.0 20%


B 1.5 22


C 7.0 7


D 14.0 10


E 50.0 12


F 12.0 9


G 1.0 44


a. If Cooper requires a minimum rate of return of 10 percent on all investments, which projects should be adopted?
b. In general, how would a capital budgeting constraint on the available amount of investment funds influence these decisions?
c. How would differing levels of project risk influence these decisions?

Explanation / Answer

a) Projects A,B D,E, and G should be adopted because they offer returns which equal or exceed the acceptability criterion.

b) A capital budgeting funds constraint could eliminate some of the less promising projects, such as D and E, depending on the level of funds available. Projects would be eliminated in reverse order of profitability in order to meet the constraint.

c) If these projects differed with respect to risk, the expected project return would have to be compared to the risk-adjusted required rate of return - which could be above or below 10%.

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