Question 6: You\'re a corporate CEO and you have 3 positive NPV projects present

Question

Question 6: You're a corporate CEO and you have 3 positive NPV projects presented to you. Discuss how you are going to proceed with these projects. How do limited resources and/or competing assets into yor analysis? Does IRR have any role here? How would you prioritize the projects...or do you even need to? Question 2: You have an opportunity to purchase a Magic Box. The Magic Box spits out a crisp $50 bill every year on the anniversary of the purchase date...forever. As an added bonus it also spits out a $100 bill on the purchase date. Your discount rate is 6%. What is the most you would pay for the box? How much would you pay for the Box if it stops working after the 25t payment? Provide a real-world example of a business that closely resembles a Magic Box

Explanation / Answer

6)

At first one shall choose the project that provides the highest NPV. However we have to consider the fact that if the projects a re mutually exclusive or not and whether they can be repeated or not. If they are not mututally exclusive one can chose more than one project. If they are repeatable one can redo the project more than once. In this case one shall choose the project with the highest IRR.
If the capital budget allows for only one project one shall go with the project that fits in the budget and also has the highest NPV.

7)
PV of $50 = 50/0.06= $833.33

Plus $100 on purchase date = $833.33+$100=$933.33

Hence one shall pay at most $933.33- This resembles a perpetuity

If it stops working after 25 payments:
n=25
rate = 0.06
PMT=50
=PV(0.06,25,50)
=$639.17
Total value = $739.17 ($100 added up as $100 payment)- This resembles an annuity

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