Question

Your company is considering the following projects: 0 1 2 3 4 Project 1 -10,000   0  ...

Your company is considering the following projects:

0 1 2 3 4
Project 1 -10,000   0   0 10,000 5,000
Project 2 -7,000 0 4,000 4,000 4,000
Project 3 -3,000 0 5,000

If the expansion budget is limited at $12 million, which project/projects should the company take?

a.

Project 3
b.

Projects 2 & 3
c.

Project 1 and 3
d.

Project 2

I am not given a discount rate for this question.

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Homework Answers

Answer #1

If we are given a budget and we need to choose 2 projects our goal is to maximize the NPV.

If we opt for Project 1, then we cannot opt for any other project as our budget won't allow to. So, Option C cannot be the answer.

Only project 3 can also not be the answer because we won't be able to utilize our budget efficiently.

Now, comparing Option A and Option B we will opt for Option B because we will get to optimize our budget and can have a higher NPV then we could have got in case of Option A.

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