If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made

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University of Phoenix. Business For Finance. Week 4 Assignment.
April 2011
FINANCIAL MANAGEMENT – PRINCIPLES AND APPLICATIONS CHAPTER 10
INTEGRATIVE PROBLEM
11. Caledonia is considering two investments with one-year
lives. The more expensive of the two is the better and will produce
more savings. Assume these projects are mutually exclusive and that
the required rate of return is 10 percent. Given the following
after-tax net cash flows: YEAR PROJECT A PROJECT B 0 –$195,000
–$1,200,000 1 240,000 1,650,000
A. Calculate the net present value.
B. Calculate the profitability index.
C. Calculate the internal rate of return.
D. If there is no capital-rationing constraint, which project
should be selected? If there is a capital-rationing constraint, how
should the decision be made?

A. Calculate the net present value
NPV Project A= -195000 + (240000/1.10) = -195000 + 218182 =
$23,182
NPV Project B= -1200000 + (1650000/1.10) = -1200,000 + 1500,000
= 300,000

 

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