Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm’s fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows.
Project: Initial Investment: IRR: PV of inflows at 20%:
A $3,000,000 21% $3,050,000
B 9,000,000 25% 9,320,000
C 1,000,000 24% 1,060,000
D 7,000,000 23% 7,350,000
1. Use the NPV approach to select the best group of projects.
2. Use the IRR approach to select the best group of projects in the required rate of return is 23.5%
nswer : we will choose Projects C and D because this combination maximizes NPV at $410,000 and only requires $8,000,000 initial investment
Our budget is $ 1,000,000
so invest in
C 1,000,000 24% 1,060,000
D 7,000,000 23% 7,350,000
Total investment 8,000,000 and return 8,410,000
because maximizes NPV at $410,000
2. Use the IRR approach to select the best group of projects in the required rate of return is 23.5%
then we should select B and C option as follow
B 9,000,000 25% 9,320,000
C 1,000,000 24% 1,060,000
So total investment will be 10,000,000 and Pv of flow is 10,380,000 and according to IRR approch 23.5 %or more return required so in these project we have more then 23.5% return
