The following six capital projects are considered for a manufacturing company an
ID: 2426343 • Letter: T
Question
The following six capital projects are considered for a manufacturing company and the
project will end at the end of 10 years. The initial investments for the projects are 300k,
400k, 450k, 500k, and 600k. The annual return for these projects are 80k, 100k, 105k,125k and 140k and the salvage value for these projects
at the end of year 10 are 50k, 50k,60k, 75k and 75k respectively. You have 1 million dollars to fund the right projects. Use
the methods outlined in lesson 6 and create an optimum portfolio. Use a MARR of 10%
Explanation / Answer
By comparing the net present value of projects, we can decide about the project to be funded first and onwards. The project having higher NPV should be selected. Calculation of NPV when MARR = 10% (in $K) Projects Year PV Factor = 1 / (1+r)^n A B C D E Cash Flows PV Cash Flows PV Cash Flows PV Cash Flows PV Cash Flows PV 0 1 -300 -300.00 -400 -400.00 -450 -450.00 -500 -500.00 -600 -600.00 1 0.909090909 80 72.73 100 90.91 105 95.45 125 113.64 140 127.27 2 0.826446281 80 66.12 100 82.64 105 86.78 125 103.31 140 115.70 3 0.751314801 80 60.11 100 75.13 105 78.89 125 93.91 140 105.18 4 0.683013455 80 54.64 100 68.30 105 71.72 125 85.38 140 95.62 5 0.620921323 80 49.67 100 62.09 105 65.20 125 77.62 140 86.93 6 0.56447393 80 45.16 100 56.45 105 59.27 125 70.56 140 79.03 7 0.513158118 80 41.05 100 51.32 105 53.88 125 64.14 140 71.84 8 0.46650738 80 37.32 100 46.65 105 48.98 125 58.31 140 65.31 9 0.424097618 80 33.93 100 42.41 105 44.53 125 53.01 140 59.37 10 0.385543289 80 30.84 100 38.55 105 40.48 125 48.19 140 53.98 Salvage value 0.385543289 50 19.28 50 19.28 60 23.13 75 28.92 75 28.92 Net Present Value 210.84 233.73 218.31 296.99 289.16 Project D (Investment $500k) having a higher NPV i.e.$296.99 k , hence it should be selected first. Remaining investment of $500 K should be used to fund project B having higher NPV compared to project A and C as Project E not possible to start with $500K. Optimum Portfolio is as under Project D $500K Project B $400K Balance in cash $100K Total Fund $1 million