The board of directors of Proctor and Gumble Co. is considering seven large capi

Question

The board of directors of Proctor and Gumble Co. is considering seven large capital investments. Each investment can be made only once. These investments differ in the estimated long-run profit that they will generate as well as the amount of capital required, as shown by the following table:

The total amount of capital available for these investments is $100 million. Investment opportunities 1 and 2 are mutually exclusive, and so are 3 and 4. Furthermore, neither 3 nor 4 can be undertaken unless one of hte first two opportunities are undertaken. There are no such restrictions on investment opportunities 5, 6, and 7. Let us suppose the company is looking to maximize profit (in millions), what is the total profit they could earn?

Note that the estimated profit is calculated (meaning the capital cost is already accounted for). Secondly, if your solution is 98,000,000, record 98 as your solution.

Investment Opportunity Estimated Profits (millions) Capital Required (millions) 1 17 43 2 10 28 3 15 34 4 19 48 5 7 17 6 13 32 7 9 23

Explanation / Answer

Ans:- In this case, return on investment needs to be calculated for each investment opportunity. The same is explained in table below:-

The return on investment is highest in opportunity 2, followed by 7,1, 4, 6, 5 and 3.

Since opportinities 1 and 2 are mutually exclusive. So we would take opportunity 2 because of higher return on investment.

So we would take opportinities 2, 7 and 4 to maimize the profit. Also we can take opportinuty 4 because we have taken opportinity 2.

Also total capital required would be (28+23+48) = $99 million, which is below the cap of $100 million

Therefore, total profit earned from opportinities 2,7 and 4 would be (10+9+19) = $38 million

Investment Opprtunity Estimated profits (Miilions) Capital required (Millions) Return on investment 2 10 28 2.8 7 9 23 2.555555556 1 17 43 2.529411765 4 19 48 2.526315789 6 13 32 2.461538462 5 7 17 2.428571429 3 15 34 2.266666667

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