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 internal rate of return approach to ranking projects, which project(s) 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 internal rate of return approach to ranking projects, which project(s) should the firm accept? (See Table 10.4)

Quizplus · Accepted Answer

Using the internal rate of return approach to ranking projects, the firm should accept projects with the highest IRR until the budget is exhausted. Projects 2, 3, and 5 have the highest IRRs of 22%, 21%, and 20.4% respectively, and their total cost is $860,000. Therefore, the firm should accept projects 2, 3, and 5, which fall within the budget constraint of $1,000,000. Projects 1 and 4 have lower IRRs and project 6 exceeds the budget constraint.

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