Table 10.4
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.
-Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 10.4)

Question

Table 10.4
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent. 
-Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 10.4)

Quizplus · Accepted Answer

Projects 1, 2, 3, 5, and 6 have positive NPVs when discounted at the 15 percent cost of capital. Project 4 has a negative NPV and should therefore be rejected. Since the firm is subject to capital rationing, it should accept the projects with the highest positive net present values until it exhausts its capital budget. Therefore, the firm should accept projects 1, 2, 3, 5, and 6, which have a total NPV of $810,000 and use up the entire capital budget.

Table 10.4 A Firm Must Choose from Six Capital Budgeting Proposals Outlined