A firm with a 13% cost of capital must select the optimal group of projects from
ID: 2715374 • Letter: A
Question
A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million.
Project
Initial Investment
NPV at 13% cost of capital
A
(300,000.00)
84,000.00
B
(200,000.00)
10,000.00
C
(100,000.00)
25,000.00
D
(900,000.00)
90,000.00
E
(500,000.00)
70,000.00
F
(100,000.00)
50,000.00
G
(800,000.00)
160,000.00
Calculate the present value of cash inflows associated with each project.
Select the optimal group of project, keeping in mind that unused funds are costly.
Project
Initial Investment
NPV at 13% cost of capital
A
(300,000.00)
84,000.00
B
(200,000.00)
10,000.00
C
(100,000.00)
25,000.00
D
(900,000.00)
90,000.00
E
(500,000.00)
70,000.00
F
(100,000.00)
50,000.00
G
(800,000.00)
160,000.00
Explanation / Answer
Determination of the cash flows and selecting the investments:
Project
Initial investment
NPV
Cash inflows
Choose
A
-300,000
84,000
384,000
a
B
-200,000
10,000
210,000
r
C
-100,000
25,000
125,000
a
D
-900,000
90,000
990,000
r
E
-500,000
700,000
1200,000
a
F
-100,000
50,000
150,000
a
G
-800,000
160,000
960,000
r
Project
Initial investment
NPV
Cash inflows
Choose
A
-300,000
84,000
384,000
a
B
-200,000
10,000
210,000
r
C
-100,000
25,000
125,000
a
D
-900,000
90,000
990,000
r
E
-500,000
700,000
1200,000
a
F
-100,000
50,000
150,000
a
G
-800,000
160,000
960,000
r
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