The following table lists the results of a capital budgeting analysis for smaller nine projects Truman may consider in the future. The firm uses an 8% required rate of return for all of them. The projects are all mutually exclusive and Truman Inc. has enough resources to finance simultaneously no more than three projects. Which project(s) should Truman choose (if any)? Why?
|
Project |
IRR |
PI |
NPV |
|
A |
10.3% |
1.18 |
$47 |
|
B |
8.7% |
1.25 |
$324 |
|
C |
17.0% |
1.26 |
$40 |
|
D |
6.8% |
0.92 |
- $16 |
|
E |
12.5% |
1.13 |
$210 |
|
F |
4.5% |
1.14 |
$360 |
|
G |
7.2% |
0.76 |
- $115 |
|
H |
8.1% |
1.02 |
$215 |
|
I |
16.8% |
1.35 |
$50 |
When projects are mutually exclusive, we should the accept only one but here we can choose three. So, we should three with top positive NPV. Those three projects with highest positive NPV will increase firm value.
Hence, correct projects are Project F, Project B and Project H
The following table lists the results of a capital budgeting analysis for smaller nine projects Truman...