You are in charge of one division of Yeti Surplus Inc. Your decision is subject

Question

You are in charge of one division of Yeti Surplus Inc.  Your decision is subject to capital rationing.  Your division has 4 indivisible projects available, detailed as follows:

Project Initial Outlay IRR NPV

1. 2 million 18% 2,500,000

2. 1 million 15% 950,000

3. 1 million 10% 600,000

4. 3 million 9% 2,000,000

If you must select projects subject to a budget constraint of 5 million dollars, which set of projects should be accepted so as to maximize firm value?

A. Projects 1, 2 and 3

B. Projects 2,3 and 4

C Project 1 only

D Projects 1 and 4

Explanation / Answer

Hi,

Project 1 and 4 should be selected as their combination offers the highest NPV of 2500000 + 2000000 = 4500000

Option D (Project 1 and 4) is correct.

Thanks.

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