Project 
Investment 
Net Present Value 

A 
5 
2 

B 
4 
1 

C 
9 
3 

D 
5 
1 

E 
2 
1 
Using the Profitability Index, which projects should you choose given the budget constraint? and
Which would you choose if there was no capital rationing?
Year 0 Years 15
Investment $63,000
Sales $300,000
Variable costs@ 78.5% 235,500
Fixed costs 25,000
Depreciation 12,600
Pretax Profit 26,900
Taxes @ 21% 5,649
Aftertax Profits 21,251
Depreciation 12,600
Cash Flows 33,851
Assume the cost of capital is 13%.
NPV = $56,061.80
Answer parts a through c
Answer part b
Order of project selection based on profitability index  Project E , A ,C, then Last B
Order of Project selection if no capital rationing  project
C,A,E and last B
Answer part a through c
a . NPV = $ 122,016.26  $ 83,000
= $ 39,016.26
Note: Depreciation will be $ 16,600
b. NPV = $ 208,672.05  $63,000
= $ 145,672.05
c. Break even level of sales = $ 273,100
or $ 260,500 if u excludes depreciation from ur decision making .
BEP is level at which contribution equals to sales.that is No profit or No loss.
Dear student I beg ur pardon for answers a. It’s a time consuming one please post part a again
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