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Question Description

Option #1: Capital Rationing

Table with Cash Flows for 5 projects.

Project A Project B Project C Project D Project E
Initial Investment -$100,000 -$25,000 -$40,000 -$10,000 -$150,000
Year 1 $50,000 $15,000 $20,000 $7,000 $100,000
Year 2 $40,000 $10,000 $15,000 $4,000 $25,000
Year 3 $20,000 $5,000 $5,000 $2,000 $10,000
Year 4 $10,000 $1,000 $5,000 $1,000 $10,000
Year 5 $1,000 $10,000
Year 6 $1,000 $10,000
  1. Calculate the IRR for each of the projects presented. Rank the projects based on their IRR.
  2. Graph the projects on an Investment Opportunity Schedule (interest rate on the vertical axis and initial investment on the horizontal). Suppose the firm has a capital rationing amount of $170,000 and a required rate of return of 10%.
  3. Which projects should the firm implement based on your analysis using the IRR approach above? Write an email to your CFO explaining your rationale proving the choices based on the considerations of shareholder value and the maximum investment budget.
  • Submit your 3 to 4 page paper in a Word document, showing all of your calculations (attach Excel File if necessary) with a minimum of four references.
  • Use terms, evidence, and concepts from class readings.