I. (24 Points) Docs R Us has just finished evaluating several projects. Ther o o

Question

I. (24 Points) Docs R Us has just finished evaluating several projects. Ther o ost of capital is 10%. NPV's are calculated by the firm's current cost of capital. Project $21,000 $17,000 $15,000 $14,000 4,000 $5,000 11% $4,000 16% $2,000 12% $4,000 17% $-1,000 % A. (6 Points) With no capital rationing, and assuming the projects are of the same risk, which projects should Docs R Us accept? Why? B. (6 Points) If Docs R Us has a Capital Budget limit of $40,000, and assuming the projects are of the same risk, which projects should they accept? Why?

Explanation / Answer

Firms should accept all projects with positive NPV, subject to availability of funds. A project with positive will increase firm value.

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