You have a $1 million capital budget and must make the decision about which investments your firm should undertake for the coming year.There are three projects available and the cash flows of each project appear below.Assume a cost of capital of 12%.Which project or projects do you select?

Question

Quizplus · Accepted Answer

PI (project 1)= PV of CF(year 1-3)/ initial outlay = 631,264/400,000 = 1.58
PI (project 2)= PV of CF(year 1-3)/ initial outlay = 795,998/500,000 = 1.59
PI (project 3)= PV of CF(year 1-3)/ initial outlay = 1502,710/1,000,000 = 1.50
Begin by accepting the project with the highest PI,then continue to accept additional projects until bump into the $ 1 million capital constraint.Also,the sum of NPV of project 1 and project 2 is greater than the NPV of project 3.

You Have a $1 Million Capital Budget and Must Make