Question

A company has a capital budget of $500 million and is evaluating the following capital projects. What should the company do?

• Accept projects A and B
• Accept projects B, C, and D
• Accept projects A, B, and C
• Accept projects A, B and E
• Accept all the projects

• Project	Initial Investment ($ millions)	PV(NCF) ($ millions)
  A	200	370
  B	200	480
  C	200	460
  D	100	210
  E	100	180

Answer 1

The company shall select the combinations of all those projects which will give the company the highest PV within the capital budget of $ 500 million.

The best combination will be to select project B, C and D as they are generating the highest PV within the capital budget. The PV generated from these projects is computed as follows:

= Project B + Project C + Project D

= $ 480 million + $ 460 million + $ 210 million

= $ 1,150 million

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