Question

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

Projects 1, 2 and 3 require 5, 25, and 20 additional engineers, respectively. If the company can allocate only 40 employees to this expansion, which project/projects should the company take?

I am not given a discount rate for this question.

Answer 1

If the discount rate had been given to us, we would have used the NPV method. But since it has not been given, we would try to do it a little differently. We would use the cashflows without discounting. So, for poject 1, the return would be = -10000 + 10000 + 5000 = 5000. For project 2, = -7000 + 4000 + 4000 + 4000 = 5000. And, for project 3 = -3000 + 5000 = 2000. Hence, we see that we will have the highest profit if we do projects 1 and 2. The number of employees required is also 25 + 5 = 30, which is less than 40. Hence, we will take projects 1 and 2.