Table 10.5
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.
-Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 10.5)

Question

Table 10.5
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent. 
-Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 10.5)

Quizplus · Accepted Answer

Using the internal rate of return approach, we calculate the IRR for each project and choose the projects with the highest IRR as long as we do not exceed the capital budget of $1,000,000.

Project 1: IRR = 24%
Project 2: IRR = 19%
Project 3: IRR = 16%
Project 4: IRR = 13%
Project 5: IRR = 17%
Project 6: IRR = 8%

Based on these calculations, we should choose Projects 1, 2, 3, and 5, which have the highest IRRs and a total cost of $900,000, which is within the capital budget constraint of $1,000,000. Therefore, the correct answer is B.

Table 10.5 A Firm Must Choose from Six Capital Budgeting Proposals Outlined