You are in charge of one division of Bigfella Conglomerate Inc.Your division is subject to capital rationing.Your division has 4 indivisible projects available,detailed as follows:
If you must select projects subject to a budget constraint of 5 million dollars,which set of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3
B) Project 1 only
C) Projects 1 and 4
D) Projects 2, 3 and 4

Question

You are in charge of one division of Bigfella Conglomerate Inc.Your division is subject to capital rationing.Your division has 4 indivisible projects available,detailed as follows:
 If you must select projects subject to a budget constraint of 5 million dollars,which set of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3 
B) Project 1 only 
C) Projects 1 and 4 
D) Projects 2, 3 and 4

Quizplus · Accepted Answer

Projects 1 and 4 have the highest total NPV of $6.3 million, which is greater than the budget constraint of $5 million. By selecting only these two projects, the division can maximize the firm value without exceeding the budget constraint. The other options either have lower total NPV or exceed the budget constraint.

You Are in Charge of One Division of Bigfella Conglomerate