Question

B Pharmaceuticals has $750,000 allocated for capital expenditures. Which of the following projects should the company...

B Pharmaceuticals has $750,000 allocated for capital expenditures. Which of the following projects should the company accept to stay within the $750,000 budget? How much does the budget limit cost the company in terms of its market value? The opportunity cost of capital for each project is 11 percent.

Project Investments ($ thousands) NPV ($ thousands) IRR %
1 300 66 17.2
2 200 -4 10.7
3 100 14 12.1
4 350 73 18
5 400 48 13.5
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Homework Answers

Answer #1

Accept projects with highest IRR while ensuring that IRR is more than cost of capital and capex is completely used up

Therefore

Accept project 4 and 1 as they have highest IRRs of 18 & 17.2

Remaining capex left = 750000-inv project 4 - inv project 1 = 750000-350000-300000 = 100000

We have 100 K left

We can additionally choose project 3 as inv cost is 100 K and IRR is more than cost of capital

Therefore projects to choose are 1,3 & 4

Cost of budget = budget*cost of capital = 750000*0.11=82500

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