A firm has a budget constraint of $35 million to invest in new projects.Given the following information on four independent projects, what is the loss to the firm from the capital rationing constraint?

Question

Quizplus · Accepted Answer

The best choice would be to invest in projects 1, 2, and 4 which have a combined NPV of $30.72 million, leaving a remaining budget of $4.28 million that could not be invested due to the capital rationing constraint. The loss to the firm from this constraint is equal to the NPV of the project that could not be invested, which is $4,278,667 for project 3. Therefore, the answer is A.

A Firm Has a Budget Constraint of $35 Million to Invest