Question 29 - Assume that the manager faces a capital budget constraint with res

Question

Question 29 -

Assume that the manager faces a capital budget constraint with respect to total dollars available today to invest in new projects, $46 million. Assume same WACC for each project. All else equal, which project or set of otherwise independent projects should the manager choose and why?

          

Project

NPV

(in $millions)

IRR

Required Investment today

A

$ 10

14.0%

$ 22

B

$ 10

12.9%

$ 23

C

$ 11

14.1%

$ 25

Project

NPV

(in $millions)

IRR

Required Investment today

A

$ 10

14.0%

$ 22

B

$ 10

12.9%

$ 23

C

$ 11

14.1%

$ 25

Explanation / Answer

A

B

C

NPV

10

10

11

IRR

14

12.9

14.1

Rank

II

III

I

Required Investmnet

22

23

25

NPV is more relevant for decision making. Project A and B npv is same hence for ranking used IRR also ,Ranked the highest IRR first.

If we have select to Projects as per ranking we don’t have enough investment .ie For C $47 and A $22=$47

We cant even select C and B= 25+23=$48

Hence it is not possible to select projects as per ranks ,we have select A and B= $22+23=$45

A

B

C

NPV

10

10

11

IRR

14

12.9

14.1

Rank

II

III

I

Required Investmnet

22

23

25

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