Question

Use the table for the question(s) below.

Complete in Excel Show Work.

Consider the following list of projects:

Project	Investment	NPV
A	135,000	6,000
B	200,000	30,000
C	125,000	20,000
D	150,000	2,000
E	175,000	10,000
F	75,000	10,000
G	80,000	9,000
H	200,000	20,000
I	50,000	4,000

23.a) Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?

23.b) Assuming that your capital is constrained, which project should you invest in first? Why? Show all Calculations to receive full credit.

23.c) Assuming that your capital is constrained, what is the fifth project that you should invest in? Show all Calculations to receive full credit.

23.d) Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which projects should you invest in and in what order? Explain and show all Calculations to receive full credit.

Answer 1

(23.a)

With capital constraint, I should use NPV as the investment tool because NPV provides the dollar value of discounted cash inflows over and above the discounted cash outflows.

(23.b)

I should invest in project B first since this project has highest NPV (= 30,000) among the investment alternatives.

(23.c)

The fifth project would be investment E or F since the NPV of either of them is the fifth highest, when NPV is arranged in descending order or value (30000 > 20000, 20000 > 10000, 10000).

(23.d)

In descending order of NPV, the investments are:

B > C, H > E, F > G > A > I > D (30000 > 20000, 20000 > 10000, 10000 > 9000 > 6000 > 4000 > 2000).

Total investment value will be $600,000 when we choose investments B, C, H and F (Total investment ($) = 200000 + 125000 + 200000 + 75000).