The Suboptimal Glass Company uses a process of capital rationing in its decision
ID: 2807811 • Letter: T
Question
The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm's cost of capital is 10 percent. It will invest only $79,000 this year. It has determined the IRR for each of the following projects:
Project Project size Internal Rate of Return
A $11,000 23.0%
B 31,000 19.0
C 26,000 14.0
D 11,000 10.0
E 21,000 15.0
F 21,000 18.0
G 16,000 17.0
a. Pick out the projects that the firm should accept.
b. If projects D and E are mutually exclusive, how would that affect your overall answer? That is, which projects would you accept in spending the $79,000
Explanation / Answer
Rank investments in terms of IRR:
a. Because of capital rationing, only $79,000 worth of projects can be accepted. The four projects to accept are A,B,F and G . Others projects cannot be accepted due to capital rationing.
B.
It would not affect our decision. Due to capital rationing, we are still going to accept the four projects A,B,F and G.
Project IRR project size Total budget A 23% $11,000 $11,000 B 19% $31,000 $42,000 F 18% 21,000 $63,000 G 17% $16,000 $79,000 E 15% $21,000 $100,000 C 14% $26,000 $126,000 D 10% $11,000 $137,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.