You are the CFO of floor Covering America Inc. As part of the planning and budgeting...

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Finance

You are the CFO of floor Covering America Inc. As part of theplanning and budgeting process, each division head from thecompany's five divisions has submitted their capital request. thefollowing are the facts and figures from each division?
division I II III IV V
capital requested -10,000 -30,000 -30,000 -20,000 -10,000
NPV 5,160 2,010 490 4,870 2,290
IRR 29% 12% 11% 23% 15%
Profitability Index 1.5 1.1 1.0 1.2 1.2
The projects above are "All or Nothing" - meaning for examplethat division I requires an investment of $10M immediately, andcannot accept partial funding of its project. The Projects are NOTmutually exclusive. The cost of capital for each of the project is10%.
(a) Suppose the company has unlimited capital and can invest inall of the projects if deemed optimal, which of the projects shouldbe funded? Why?
(b) Because of challenging capital market conditions, thecompany can only raise $50M for investment in next year's projects.Which of the projects should be funded? why?

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4.2 Ratings (586 Votes)

a If the company has unlimited capital then those projects should be funded which has positive NPVs and IRRs higher than the cost of capital In this case all the projects should be funded as all See Answer

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You are the CFO of floor Covering America Inc. As part of theplanning and budgeting process, each division head from thecompany's five divisions has submitted their capital request. thefollowing are the facts and figures from each division?divisionIIIIIIIVVcapital requested-10,000-30,000-30,000-20,000-10,000NPV5,1602,0104904,8702,290IRR29%12%11%23%15%Profitability Index1.51.11.01.21.2The projects above are "All or Nothing" - meaning for examplethat division I requires an investment of $10M immediately, andcannot accept partial funding of its project. The Projects are NOTmutually exclusive. The cost of capital for each of the project is10%.(a) Suppose the company has unlimited capital and can invest inall of the projects if deemed optimal, which of the projects shouldbe funded? Why?(b) Because of challenging capital market conditions, thecompany can only raise $50M for investment in next year's projects.Which of the projects should be funded? why?

division	I	II	III	IV	V
capital requested	-10,000	-30,000	-30,000	-20,000	-10,000
NPV	5,160	2,010	490	4,870	2,290
IRR	29%	12%	11%	23%	15%
Profitability Index	1.5	1.1	1.0	1.2	1.2