The Suboptimal Glass Company uses a process of capital rationing in its decision

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 only invest $86,000 this year. It has determined the internal rate of return for each of the following projects.

a. Pick out the projects that the firm should accept. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Project E Project D Project A Project B Project G Project F Project C

b. If Projects B and G are mutually exclusive, which projects would you accept in spending the $86,000? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Project E Project B Project A Project D Project G Project F Project C

Project Project Size Internal Rate
of Return A $ 11,500 18 % B 31,500 19 C 26,500 16 D 11,500 13 E 31,500 14 F 21,500 12 G 16,500 21

Explanation / Answer

In this situation the project with more IRR than cost of capital are selected

b) since given B and g are mutually exclusive we will select only G

Project IRR is IRR more than (10%) investment cumulative investment G 21% yes $16500 $16500 B 19% yes $31500 $48000 A 18% yes $11500 $59500 C 16% yes $26500 $86000

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