At 4 million per project their total capital outlay

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cost of capital by 3%, it drops four projects and so two remain. At $4 million per project, their total capital outlay is now only $8 million and that is less than the desired $12 million.] d 68. Consider the following projects (data in thousands): Project A B C D E F G Initial cost: 10 20 20 15 30 40 20 NPV: 1.1 3.6 0.8 1.6 4.0 3.0 1.4 Which of the below statements is true? a. Projects B, E, and D have the largest PIs. b. Projects C, G, and A have the lowest PIs. c. The projects with the highest PIs have a total initial cost of $60,000 with a collective NPV of $8,200. d. The projects with the lowest PIs have a total initial cost of $80,000 with a collective NPV of $5,200. [ ANSWER: Below is listed the projects, initial costs, NPVs, and PIs. The list is ordered in terms of highest PI. Project Initial Cost NPV PIs B 20,000 3,600 1.180 E 30,000 4,000 1.133 A 10,000 1,100 1.110 D 15,000 1,600 1.107 F 40,000 3,000 1.075 G 20,000 1,400 1.070 C 20,000 800 1.040 From the information given above, we see that the only correct answer is “d” where the three projects with the lowest PIs (F, G, and C) have a total initial cost of $80,000 and a collective NPV of $5,200 .] c 69. Consider the following projects (data in thousands): Project A B C D E F G Initial cost: 10 20 20 15 30 40 20 NPV: 1.1 3.6 0.8 1.6 4.0 3.0 1.4 If you were rationed to $115,000 for the initial investment, which projects should you choose? $115,000. $115,000. [ of highest PI. Project Initial Cost NPV PIs B 20,000 3,600 1.180 E 30,000 4,000 1.133 A 10,000 1,100 1.110 D 15,000 1,600 1.107 F 40,000 3,000 1.075
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G 20,000 1,400 1.070 C 20,000 800 1.040 With capital rationing, we would like to ideally choose those projects with the highest PIs. Sometimes this cannot be achieved because those projects cost too much. From the information listed above, we see that we can successfully take those with the highest PIs. This is because the five projects with the highest PIs also cost exactly $115,000 which is our maximum investment. These five best projects are B, E, A, D, and F and they have a total NPV of $13,300. This choice is said to give us the “biggest bang for the buck.”] IV. Longer Problems 70. Don’s Computer can currently produce up to one million disks with its given capacity. Based on Don’s sales projections, demand at its current wholesale price of $5.92 is expected to exceed one million disks per year for the next eight years. With an increase of $0.05 over the current price, Don’s could still sell 1 million disks a year for eight years. This increase would create additional before-tax revenues of $0.05(1 million) = $50,000 per year. This translates into an increase in after-tax revenues of $50,000(1 – 0.4) = $30,000 per year. As an alternative to the expansion plan, then, Don’s could increase its wholesale price and obtain an increase of $30,000 in its annual net CFAT––with no other changes whatsoever in its after-tax cash flow s . The net present value from the expansion plan is $130,000. Answer the below questions assuming a required rate of return of 12%.
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