A firm has the following investment opportunities: If the cost of capital is 10% and the capital budget is limited to $280,000, which project(s)should the firm undertake?

Question

A firm has the following investment opportunities:  If the cost of capital is 10% and the capital budget is limited to $280,000, which project(s)should the firm undertake?

Quizplus · Accepted Answer

Calculating the net present value (NPV) of each project:
Project A: NPV = $30,000/(1+0.1)^1 + $20,000/(1+0.1)^2 + $40,000/(1+0.1)^3 - $100,000 = $5,479.61
Project B: NPV = $20,000/(1+0.1)^1 + $50,000/(1+0.1)^2 + $60,000/(1+0.1)^3 - $130,000 = $8,592.94
Project C: NPV = $40,000/(1+0.1)^1 + $30,000/(1+0.1)^2 + $50,000/(1+0.1)^3 - $120,000 = $9,370.49

Therefore, the best choice(s) are project B and project C, as their combined NPVs ($8,592.94 + $9,370.49 = $17,963.43) are higher than the capital budget limit of $280,000.

A Firm Has the Following Investment Opportunities: If the Cost