A firm faces the issue of which investments to undertake. There are three projects, A, B,...

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A firm faces the issue of which investments to undertake. Thereare three projects, A, B, and C, each with a horizon (duration) of8 years. For each of the three projects, financial management hasalready computed the decision-relevant measures of profitability asdepicted in the table below. These computations already incorporateissues such as taxes and inflation. There is no risk or uncertaintyinvolved and the projects’ returns are independent.
Project Initial Investment PV of Future Cash Flows NPV MIRR PB DPB
A 35,000 38,000 3,000 13.16% 3.5 3.8
B 65,000 72,500 7,500 13.54% 2.3 3.2
C 20,000 22,000 2,000 13.34% 5.5 7.12
For each of the following scenarios, derive and explain whichproject should be implemented, and what the overall attainable NPVfor the firm is.
(a) Projects are mutually exclusive, not scalable, and there areno capital constraints.
(b) Projects are not mutually exclusive, not scalable, and thefirm can raise at most £80?000 in capital to finance initialinvestments.
(c) Projects are not mutually exclusive, but are arbitrarilyscalable, and the firm can raise at most £100?000 in capital tofinance initial investments.

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3.7 Ratings (562 Votes)

a Project B with the highest NPV should be implemented Total NPV GBP7500 b Here combination of projects yielding highest total NPV but having total initial investment See Answer

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A firm faces the issue of which investments to undertake. Thereare three projects, A, B, and C, each with a horizon (duration) of8 years. For each of the three projects, financial management hasalready computed the decision-relevant measures of profitability asdepicted in the table below. These computations already incorporateissues such as taxes and inflation. There is no risk or uncertaintyinvolved and the projects’ returns are independent.ProjectInitial InvestmentPV of Future Cash FlowsNPVMIRRPBDPBA35,00038,0003,00013.16%3.53.8B65,00072,5007,50013.54%2.33.2C20,00022,0002,00013.34%5.57.12For each of the following scenarios, derive and explain whichproject should be implemented, and what the overall attainable NPVfor the firm is.(a) Projects are mutually exclusive, not scalable, and there areno capital constraints.(b) Projects are not mutually exclusive, not scalable, and thefirm can raise at most £80?000 in capital to finance initialinvestments.(c) Projects are not mutually exclusive, but are arbitrarilyscalable, and the firm can raise at most £100?000 in capital tofinance initial investments.

Project	Initial Investment	PV of Future Cash Flows	NPV	MIRR	PB	DPB
A	35,000	38,000	3,000	13.16%	3.5	3.8
B	65,000	72,500	7,500	13.54%	2.3	3.2
C	20,000	22,000	2,000	13.34%	5.5	7.12