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Solution Library
Calculating the Highest Returns from Potential Projects
Question
Your division has been allocated $15M for capital projects for the coming year. You`ve been able to identify five potential projects, as outlined in the table below, each of which will last 10 years.
Project Name Initial Cost Annual Cash Flows Discount Rate
Alpha 8M 2M 6%
Bravo 7.5M 2.25M 9%
Charlie 4M 0.75M 3%
Delta 5M 0.6M 4%
Echo 2M 0.5M 10%
a.Show the profitability index of each project.
b.Which project(s) should the firm undertake?
c.Which project(s) would the firm undertake if capital is not rationed?
Summary
The question belongs to Finance and it is about calculating which project should the business take up amongst the 5 projects. The initial cost, the annual cash flows and discount rates have been given. You need to calculate and tell which project has the highest returns or highest profitability index for a period of 10 years.
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