Capital rationing and mutually exclusive investments. 22. Capital rationing and

Question

Capital rationing and mutually exclusive investments. 22. Capital rationing and mutually exclusive investments (LO12-4) The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm's cost of capital is 10 percent. It will only invest $77,000 this year. It has determined the internal rate of return for each of the following projects. a. Pick out the projects that the firm should accept. b. If Projects A and B are mutually exclusive. how would that affect your overall answer? That is, which projects would you accepts in spending the $77,000?

Explanation / Answer

a. The firm should accept below projects on the basis of high IRR and cash outflow-

Project A=10,500

Project B=30,500

Project C=25,500

Project E=10,500

Total= $77,000

b. project B should be selected since its IRR is more.

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