$\begin{array} { l c l }
& \text { Initial Investment } & { \text { Cash flow } } \
\text { Project A } & \text { \$5 million } & \$ 2 \text { million per year for four years } \
\text { Project B } & \$ 3 \text { million } & \$ 1 \text { million per year for five years } \
\text { Project C } & \text { \$2 million } & \$ 1 \text { million per year for four years } \
\text { Project D } & \$ 3 \text { million } & \$ 1.5 \text { million per year for three years }
\end{array}$
An investor has a budget of $5 million. He can invest in the projects shown above. If the cost of capital is 6%, what investment or investments should he make?

Question

$\begin{array} { l c l } 
& \text { Initial Investment } & { \text { Cash flow } } \
\text { Project A } & \text { \$5 million } & \$ 2 \text { million per year for four years } \
\text { Project B } & \$ 3 \text { million } & \$ 1 \text { million per year for five years } \
\text { Project C } & \text { \$2 million } & \$ 1 \text { million per year for four years } \
\text { Project D } & \$ 3 \text { million } & \$ 1.5 \text { million per year for three years }
\end{array}$
An investor has a budget of $5 million. He can invest in the projects shown above. If the cost of capital is 6%, what investment or investments should he make?

Quizplus · Accepted Answer

The investor should choose the combination of projects that maximizes the net present value (NPV) within the budget. Project B and Project C together cost $5 million and provide a higher combined NPV than other options.

An Investor Has a Budget of $5 Million