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.