Question

You are the finance manager for Monkey Manufacturing Company. You have identified 5 new projects that you are considering for the next financial year. The results of your analysis are presented in the table below:

Project	Initial	Payback	Net	Internal	Profitability
	Investment	Period	Present Value	Rate of Return	Index
	($million)	(years)	($million)	(%)
A	20.00	2.5	13.8	12.2
B	10.00	3.1	7.1	12.5
C	5.00	4.2	3.4	12.3
D	5.00	2.9	3.0	11.9
E	5.00	3.4	3.7	12.8

a)       Calculate the profitability index for each investment

b)      Which project or projects would you approve if your capital expenditure budget is $25 million?

c)       If you have unlimited funds to invest, which project or projects would you approve?

d)      How would your answer to Question C change if projects C, D, and E are mutually exclusive?

Answer 1

a)

Project	Initial	Payback	Net	Internal	Profitability
	Investment	Period	Present Value	Rate of Return	Index
	($million)	(years)	($million)	(%)
A	20.00	2.5	13.8	12.2	=1+(13.8/20) =1.69
B	10.00	3.1	7.1	12.5	1+(7.1/10) =1.71
C	5.00	4.2	3.4	12.3	1+(3.4/5) =1.68
D	5.00	2.9	3.0	11.9	=1+(3/5) = 1.6
E	5.00	3.4	3.7	12.8	=1+(3.7/5) =1.74

(b) PROJECT A AND E

PROJECT WITH HIGHEST NPV SHOULD BE GIVEN CONSIDERATION

SO PROJECT A OF 20 MILLION AND AFTER THAT PROJECT E OF 5 MILLION SHOULD BE CONSIDERED

TOTAL (20+5) = 25

(c) ALL

IF GIVEN UNLIMITED FUNDS ARE THERE ALL THE PROJECTS SHOULD BE APPROVED AS ALL HAVE POSITIVE NPV

(d)PROJECT E

AGAIN IN MUTUALLY EXCLUSOVE PROJECTS ONLY I CAN BE CHOSEN

PROJECT WITH HIGHEST NPV SHOULD BE CHOSEN THAT IS PROJECT E