(Problem 10-41) Grosvenor Industries has designated $1.2 million for capital inv

Question

(Problem 10-41) Grosvenor Industries has designated $1.2 million for capital investment expenditures during the upcoming year. Its cost of capital is 14 percent. Any unused funds will earn the cost of capital rate. The following investment opportunities along with their required investment and estimated net present values have been identified:

Project Net Investment NPV Project Net Investment NPV

A $200,000 $22,000 F $250,000 $30,000

B 275,000 21,000 G 100,000 7,000

C 150,000 6,000 H 200,000 18,000

D 190,000 (19,000) I 210,000 4,000

E 500,000 40,000 J 250,000 35,000

In your response, complete the following:

1. Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?

2. Using the NPV, which projects should be accepted, considering the limit on funds available?

3. If the available investment funds are reduced to only $1,000,000:

(a) Does the list of accepted projects change from Part 2?

(b) What is the opportunity cost of the eliminated $200,000

Explanation / Answer

3. If the available investment funds are reduced to only $1,000,000: 1) Ranking as per PI Project Net Investment NPV Profiatble Index(PI) Rank A $        200,000.00 $   22,000.00 1.110 3 B $        275,000.00 $   21,000.00 1.076 6 C $        150,000.00 $      6,000.00 1.040 8 D $        190,000.00 $ (19,000.00) 0.900 10 E $        500,000.00 $   40,000.00 1.080 5 F $        250,000.00 $   30,000.00 1.120 2 G $        100,000.00 $      7,000.00 1.070 7 H $        200,000.00 $   18,000.00 1.090 4 I $        210,000.00 $      4,000.00 1.019 9 J $        250,000.00 $   35,000.00 1.140 1 Project Shoud be accepted in the following order : J , F,A , H, B Since E should not be accepted as the fund is not available to invest in it after Project H, So Project B is being choosed instead of project E Remaining Balance $25000 is unused which is invested at the cost of capital as per question 2) Using The NPV Project Net Investment NPV Rank A $        200,000.00 $   22,000.00 4 B $        275,000.00 $   21,000.00 5 C $        150,000.00 $      6,000.00 8 D $        190,000.00 $ (19,000.00) 10 E $        500,000.00 $   40,000.00 1 F $        250,000.00 $   30,000.00 3 G $        100,000.00 $      7,000.00 7 H $        200,000.00 $   18,000.00 6 I $        210,000.00 $      4,000.00 9 J $        250,000.00 $   35,000.00 2 Project Shoud be accepted in the following order : E,J,F,A 3. If the available investment funds are reduced to only $1,000,000: (a) Does the list of accepted projects change from Part 2? Yes, The Project A has to be removed (b) What is the opportunity cost of the eliminated $200,000 As per project accepted in part 2 Oppurtunity cost of eliminated $200,000 = $22000 As per project accepted in part 1 Oppurtunity cost of eliminated $200,000 = 21000 - 7000 = $14000

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