2. A firm must choose from 5 independent capital budgeting proposals outlined be
ID: 2803451 • Letter: 2
Question
2. A firm must choose from 5 independent capital budgeting proposals outlined below. The firm is subject to capital rationing and has a budget of $500,000. The firm's cost of capital is 12%. (5 points) Initial Investment $100,000 $200,000 $125,000 $100,000 $75,000 IRR 17% 15% 14% 11% 19% NPV $50,000 $10,000 $30,000 $-2,500 $25,000 Project 2 3 4 a. Using the IRR approach to rank projects, which projects should the firm accept? b. Using the NPV approach to rank projects, which projects should the firm accept?Explanation / Answer
a) Using IRR
The projects with IRR greater than 12% should be accepted the projects 1,2,3 and 5 should be selected.
Initial investments of Project 1, 2, 3 and 5 =(100000+200000+125000+75000) = $500,000 (contraint)
b) Using NPV
The capital rationing is the constraint on the spending due to limited funds. The projects 1,2,3 and 5 with positive NPV should be selected.
Initial investments of Project 1, 2, 3 and 5 =(100000+200000+125000+75000) = $500,000 (contraint)
The projects
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