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 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. What is the total NPV of all projects chosen?

Explanation / Answer

(a) The company is having $600,000 in cash to invest in projects. Making sure that the company uses up all of the available cash resources, following projects will be chosen:

By the above chosen projects, we able to use up all of the available cash resources and profitability index total is maximum than any other projects combination. In the given projects combination, all the projects are from top ranking. Also, in no other projects combination, we able to use our cash resources fully.

(b) The total NPV of all the projects chosen is $80,000.

Project Chosen Ranking Investment in $ NPV of Project Profitability Index C 1 125000 20,000 0.1600 B 2 200000 30,000 0.1500 F 3 75000 10,000 0.1333 H 5 200000 20,000 0.1000 TOTAL OF INVESTMENT $600,000 $80,000 0.5433

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