Please show your steps step by step Consider the following indivisible assets Ye

Question

Please show your steps step by step

Consider the following indivisible assets Year A B C D 0 -1 -2 -3 -3 1 1 0 0 2 2 1 0 5 2 3 1 5 0 2 Suppose you only have $7 in retained earnings at 20%. Which assets would you choose? Please clearly show: The supporting calculations for each asset. Supporting calculations for your choice of assets. Unspent capital budge, if any. Assets you purchase: The supporting calculations for each asset: Supporting calculations for your choice of assets: Unspent capital budget, if any:

Explanation / Answer

Funds available = $7

R = 20%

For Project A:                  

Present value of cash inflows = 1*(1-1/(1+R)^3) / R =1*(1-1/1.20^3)/.20 = $2.10

NPV = 2.1 – 1 = $1.1

Profitability ratio = Present value of cash inflows / present value of cash outflows = 2.1/1 = 2.1

For Project B:                   

Present value of cash inflows = 5/(1+R)^3 = 5/(1+20%)^3 = $2.89

NPV = 2.89 – 2 = $1.89

Profitability ratio = 2.89/2 =1.445

For Project C:

Present value of cash inflows = 5/1.2^2 = 3.472

NPV = 3.472 – 3 = .472

Profitability ratio = 3.472 / 3 = 1.157

For Project D:

Present value of cash inflows =2*(1-1/1.2^3)/.2 = 4.212

NPV = 4.212 – 3 = 1.212

Profitability ratio = 4.212/3 = 1.40

On the basis of profitability ratio, projects can be ranked as asset A, B, D and C.

Thus,

$1 should be invested in asset A.

$2 should be invested in asset B.

$3 should be invested in asset D.

Amount left without investment = $7 – (1+2+3) = $1

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