A major forest products company with a cost of capital of 12% has raised $15 million in financing and is considering three projects that are divisible, are not mutually exclusive and will have no residual value at the end of their 10 year term. Project A will cost a company $12 million providing $2.45 million in annual income before depreciation. Project B, costing $10.8 million, has annual projected savings before depreciation of $1.8 million. Project C costs $7.3 million and will bring in $1.7 million annually before depreciation. Assuming markets operate in the theoretical Modernist manner, if the company expects to earn a 12% return on their investments, in which project(s) should the company invest?

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To determine which projects the company should invest in, we calculate the return on investment (ROI) for each project. The ROI is calculated as the annual income or savings divided by the project cost.- Project A: ROI = $2.45 million / $12 million = 20.42%- Project B: ROI = $1.8 million / $10.8 million = 16.67%- Project C: ROI = $1.7 million / $7.3 million = 23.29%Since all projects have an ROI greater than the company's cost of capital (12%), the company should invest in all projects that it can afford with the $15 million financing. However, the company cannot afford all three projects outright as their total cost exceeds $15 million. Therefore, the company should prioritize the projects with the highest ROI.Project C has the highest ROI, followed by Project A, and then Project B. The company can afford to invest in all of Project A ($12 million) and all of Project C ($7.3 million) if only considering these two, but since the total exceeds the available $15 million, this scenario is not possible without additional constraints. Given the options, the best choice within the provided context is to invest in all of Project A and all of Project C, as they offer higher returns than Project B within the constraint of the available financing. This analysis assumes the projects are divisible and not mutually exclusive, but the total investment should not exceed the available financing. The correct choice, based on maximizing ROI within the financing limit, is to select projects with the highest individual ROIs, which are A and C. However, the initial analysis mistakenly overlooked the financing constraint when suggesting both A and C could be fully funded. Given the financing limit, the company must prioritize based on ROI and available funds, leading to a reconsideration of how to allocate the $15 million effectively.

A Major Forest Products Company with a Cost of Capital