Question

Imperial Systems has $1 million available for capital investments during the current year.
A list of possible investment projects, together with their net investments and net present
values, is provided in the following table:

Answer 1

Profitability Index: NPV + IO / IO
1. 1.10 > 1 Accept!
2.1.082 > 1 Accept!
3. 1.218 > Accept!
4. 1.033 > 1 Accept!
5. 1.08 > 1 Accept!
6. 1.04 > 1 Accept!
7. 1.08 > 1 Accept!
8. 0.91 < 1! Deny!

Rank of Profitability Index:
3
1
2
7 and 5
6
4
8

b. The projects selected = Project 3 + Project 1 + Project 2
Fund spent = $275,000 + $200,000 + $500,000 = $975,000, Total NPV is $121,000
Unspent fund = $100,0000 – $975,000 = $25,000

Answer 2

Imperial Systems has $1 million available for capital investments during the current year. A list of possible investment projects, together with their net investments and net present values, is provided in the following table: Project Net Investment Net Present Value 1 $200,000 $20,000 2 500,000 41,000 3 275,000 60,000 4 150,000 5,000 5 250,000 20,000 6 100,000 4,000 7 275,000 22,000 8 200,000 -18,000 a) Rank the various investment projects in terms of their profitability indexes (computed to three decimal points). b) In the order of decreasing profitability index values and considering the capital constraints, which projects should be adopted? Are all capital funds expended? c) Is there another combination that produces a higher aggregate net present value than the one developed in part b? d) If less than the entire amount of available funds is invested, what is the opportunity cost of the unused funds?