CEO’s project selection John is a CEO of an investment company and he is provide
ID: 2765458 • Letter: C
Question
CEO’s project selection
John is a CEO of an investment company and he is provided with 5 different potential projects and must determine which projects to choose. The projects require different amounts of capital and different expected net present values (NPV) over the next three years.
Capital Required (in $000s)
Project NVP (in $000s) Year 1 Year 2 Year 3
1 140 70 20 25
2 180 85 40 15
3 120 60 20 20
4 80 30 30 15
5 200 50 15 10
• Determine which set of projects should be selected in order to achieve the maximum net present value if the decision maker has $150,000 available for investment each year.
• Determine which set of projects should be selected in order to achieve the maximum net present value if the following two conditions must also be met:
– a) If project 1 is selected, then project 2 must be selected, and vice versa.
– b) Since projects 4 and 5 require outsourcing various operations, John wants at most one of these projects to be included in the solution and not both
Explanation / Answer
If $150,000 available each year . Then The selection of projects will be 1 Projcet NPV Max capital in a year 1 140 70 4 80 30 5 200 50 Total 420 150 2 If condition a&b to be met together, the set of projects giving maximum NPV are Projcet NPV Max capital in a year 3 120 60 5 200 50 Total 320 110
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