The CFO of your company has determined that the firm’s capital investment budget

Question

The CFO of your company has determined that the firm’s capital investment budget will be limited to $3,000,000 for the upcoming year. Unfortunately, this amount is not sufficient to cover all of the proposed projects under consideration at the firm. Each potential project is labeled with a single letter (A-J). The calculated values (NPV) for each project, in order are: $72,658 ; $36,418 ; $212,150 ; $70,925 ; $11,400 ; $56,842 ; $93,600 ; $65,350 ; $48,842 ; and $39,815. The initial investment required for each respective project: $628,200 ; $352,100 ; $1,245,600 ; $814,300 ; $124,500 ; $958,000 ; $2,356,400 ; $226,900 ; $1,650,000 ; and $714,650. The projects require supervision (A-J: 13, 15, 8, 6, 24, 10, 5, 9, 3, and 11 resource months respectively) and there are a total of 50 resources months of supervision available across all of these projects. We are also informed that projects A, D, and H are mutually exclusive. Which projects should be selected for action in the current budget cycle and what is the final value of the objective function? (Assume this is a maximization problem)

Explanation / Answer

Project NPV Initial investment Inclusion NPV Initial investment A 72658 628200 0 0 0 B 36418 352100 1 36418 352100 C 212150 1245600 1 212150 1245600 D 70925 814300 0 0 0 E 11400 124500 1 11400 124500 F 56842 958000 1 56842 958000 G 93600 2356400 0 0 0 H 65350 226900 1 65350 226900 I 48842 1650000 0 0 0 J 39815 714650 0 0 0 382160 2907100 Sum of inclusion of A D and H 1 =Binary Inital investment

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