Thus npv 600000 for project a 450000 for project b

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Thus, NPV = $600,000 for project A, $450,000 for project B, and $300,000 for project C. With capital rationing, the firm can undertake either project A only or projects B and C. Ranking projects according to their NPV , the firm would undertake projects B and C with total NPV of $750,000 ( b ) Since the firm faces capital rationing, however, it should use the profitability index ( PI ) as its investment criterion. The PI of each project is given by the ratio of the PVNCF to the C 0 of each project For project A, PI = $3,000,000/$2,400,000 = 1.25. For project B, PI = $1,750,000/$1,300,000 = 1.35. For project C, PI = $1,400,000/$1,100,000 = 1.27. Using the PI investment criterion indicates that the firm should undertake projects B and C. The reason for this is that projects B and C provide a higher rate of return per dollar invested than project A. Note that the sum of the NPV of projects B and C exceeds the NPV for project A. 10. The cost of equity capital for this firm ( ke ) can be calculated with the dividend valuation model, as follows ke = ( D/P) + g where D is the amount of the yearly dividend paid per share of the common stock of the firm, P is the price of a share of the common stock of the firm, and g is the expected annual growth rate of dividend payments. Since the company pays half of its expected $200 million in net after-tax earnings in dividends and there are 100 million shares of common stock of the firm, the dividend per share is $1. With a share of the common stock of the firm selling for eight times current earnings, the price of a share of the common stock of the firm is $8. With the expected annual growth of earnings and dividends of the firm of 7.5 percent, the cost of equity capital for this firm is ke = ($1/$8) + 0.075 = 0.125 + 0.075 = 0.20 or 20%
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Spreadsheet problem 1: The present value of net revenue is $760. The firm should purchase the machine since the NPV of the project is positive.
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