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P12-18 Capital rationing—IRR and NPV approaches Valley

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P12-18 Capital rationing—IRR and NPV approaches Valley Corporation is attempting to select the best of a group of independent projects competing for the firm's fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will earn less than its 15% cost of capital, thereby resulting in a present value of inflows that is less than the initial investment. The firm has summarized, in the following table, the key data to be used in selecting the best group of projects.

Project Initial investment IRR Present value of inflows at 15%
A $5,000,000 0.17 $5,400,000
B 800,000 18 1,100,000
C 2,000,000 19 2,300,000
D 1,500,000 16 1,600,000
E 800,000 22 900,000
F 2,500,000 23 3,000,000
G 1,200,000 20 1,300,000


a. Use the internal rate of return (IRR) approach to select the best group of projects.
b. Use the net present value (NPV) approach to select the best group of projects.
c. Compare, contrast, and discuss your findings in parts a and b.
d. Which projects should the firm implement? Why?
Submitted: 1 year ago.
Category: Homework
Expert:  Linda_us replied 1 year ago.

Welcome and Thanks for asking your question.

 

I can help you with this question. Please let me know your deadline.

 

Regards

 

Linda

Customer: replied 1 year ago.
My deadline is Thursday by 3 PM.
Expert:  Linda_us replied 1 year ago.
Thanks I will post the solution by your deadline.
Customer: replied 1 year ago.

Thank you!!


 

Customer: replied 1 year ago.

I don't understand how project F's total investment is $2,500,000 when that is the initial investment amount and there is a 23% IRR.

Customer: replied 1 year ago.
Relist: Inaccurate answer.
The wrong IRR was used for project A. It should be .17% not 17%. Also I don't understand how the initial investment in project F can be the same as the total investment.
Expert:  Linda_us replied 1 year ago.
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Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7105
Experience: Post Graduate Diploma in Management (MBA)
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Customer: replied 1 year ago.

How do I provide you the entire question for a new problem? The question box is limited in the number of characters, so I can't ask the entire question.

Expert:  Linda_us replied 1 year ago.
Post partial question and then you can post remaining as reply. Please do write For Linda in front of your post.
Customer: replied 1 year ago.
Thank you.

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