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# P12-18 Capital rationing—IRR and NPV approaches Valley

### Resolved Question:

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: 3 years ago.
Category: Homework
Expert:  Linda_us replied 3 years ago.

Welcome and Thanks for asking your question.

Regards

Linda

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

Thank you!!

Expert:  Linda_us replied 3 years ago.
Customer: replied 3 years 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 3 years ago.
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 3 years ago.
THIS ANSWER IS LOCKED!

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Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7291
Experience: Post Graduate Diploma in Management (MBA)
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Customer: replied 3 years 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 3 years ago.
Post partial question and then you can post remaining as reply. Please do write For Linda in front of your post.
Customer: replied 3 years ago.
Thank you.

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