Galaxy Satellite Co. (120 Points) Galaxy Satellite Co. is attempting to select t

Question

Galaxy Satellite Co. (120 Points)

Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows.

Project PV of Inflows   Initial Investment                   IRR

A         $3,050,000        $3,000,000                   21%

B          $9,320,000        $9,000,000                   25%

C         $1,060,000        $1,000,000                   24%

D         $7,350,000        $7,000,000                   23%

Use the NPV approach to select the best group of projects. (Note that just the PV of inflows is given, you must subtract the initial investment to find the NPV.)

Use the IRR approach to select the best group of projects. (Note that the discount rate or the cost of capital is 20%.)

Which projects should the firm implement based on your analysis of both techniques and given the capital rationing amount? Write an email to your boss, Andy Fast, the CFO, explaining your rationale proving the choices based on the considerations of shareholder value and the maximum investment budget. Keep in mind that you are less concerned with using the whole budget than with maximizing the total return to Galaxy satellite.

.

Explanation / Answer

Answer:

Selection of project as per NPV method

Selection of project on the basis of IRR method

Email to your boss,

Subject: selection of project for investment

Respected Andy,

With reference to above subject, I have analyzed all the projects on the basis of NPV and IRR method. After doing analysis I suggest you to investment in the following projects.

Regards,

Analyst

Project PV of inflows Initial Investment NPV of project = (PV of inflows - Initial Investment) A $ 30,50,000 $ 30,00,000 $ 50,000 B $ 93,20,000 $ 90,00,000 $ 3,20,000 C $ 10,60,000 $ 10,00,000 $ 60,000 D $ 73,50,000 $ 70,00,000 $ 3,50,000

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