Ramazotti SA has $1 million allocated for capital expenditures. The opportunity
ID: 2780115 • Letter: R
Question
Ramazotti SA has $1 million allocated for capital expenditures. The opportunity cost of capital for each project is 11%. It has the following projects available:
(a) Which project(s) should the company accept to stay within the $1 million budget? Don’t be too rigorous, just find a combination that cannot obviously be improved upon.
(b) How much does the budget limit cost the company in terms of forgone NPV?
NPV (in $1,000) IRR (in %) 17.2 Project Investment (in $1,000) 300 200 250 100 100 350 400 10.7 16.6 12.1 11.8 18 13.5 43 14 4 63 48Explanation / Answer
a) As is evudent if we select top three IRR projects, 1,3,4 and 6 will give a total NPV of 66+43+63+14=186 thousand dollars
This will be for a total investment of 1 million
b) Forgone NPV is for project 5 and 7 of total 48+7=53 thousand dollars
Project 2 will not be used in this because it has negative NPV and less than cost of capital IRR
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