(Problem 10-41) Grosvenor Industries has designated $1.2 million for capital investment expenditures during the upcoming year. Its cost of capital is 14 percent. Any unused funds will earn the cost of capital rate. The following investment opportunities along with their required investment and estimated net present values have been identified:
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| Project | Net Investment | NPV | Project | Net Investment | NPV |
| A | $200,000 | $22,000 | F | $250,000.00 | $30,000.00 |
| B | $275,000 | $21,000 | G | $100,000.00 | $7,000.00 |
| C | $150,000 | $6,000 | H | $200,000.00 | $18,000.00 |
| D | $190,000 | -$19,000 | I | $210,000.00 | $4,000.00 |
| E | $500,000 | $40,000 | J | $250,000.00 | $35,000.00 |
In your response, complete the following:
- Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?
- Using the NPV, which projects should be accepted, considering the limit on funds available?
- If the available investment funds are reduced to only $1,000,000:
- Does the list of accepted projects change from Part 2?
- What is the opportunity cost of the eliminated $200,000?
Guided Response:
Review several of your classmates’ postings. Respond to at least two of your classmates by commenting on common responses in the ranking of the projects and by posing a question to challenge their ranking
This section lists options that can be used to view responses. here are two students posts to respond to..
Ranking Investment Alternative Karen Bellow 3/16/2016 7:56:50 PM
Project Present Value of net cash Net Investment NPV Profitability Ranking
A $220,000 $200,000 $22,000 1.10 3
B $296,000 $275,000 $21,000 1.076 6
C $156,000 $150,000 $6,000 1.04 8
D $171,000 $190,000 ($19,000) 0.90 10
E $540,000 $500,000 $40,000 1.080 5
F $280,000 $250,000 $30,000 1.12 2
G $107,000 $100,000 $7,000 1.07 7
H $218,000 $200,000 $18,000 1.09 4
I $214,000 $210,000 $4,000 1.02 9
J $285,000 $250,000 $35,000 1.14 1
Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted? The projects that should be selected are the ones with the highest profitability however due to the limit of funds the following are the projects that should be accepted. (3)A, (5) E, (2) F, (1)J. because they amount to the funds available.
Using the NPV, which projects should be accepted, considering the limit on funds available? By using the NPV to determine which projects should be accepted is based on if the present value of incremental net cash inflows is greater than the incremental investment net cash outflow then those are the projects that should be accepted. NVP projects with a positive or zero can be accepted so with that being said project D would be eliminated. Being that there are a limit of funds, (3)A, (5) E, (2) F, (1)J should be accepted.
If the available investment funds are reduced to only $1,000,000:
Does the list of accepted projects change from Part 2? Yes the list of accepted projects will change because there was a reduction in funds of $200,000. So the projects that will be accepted now that will be (1)J, (2)F and (5)E. The Net Investment of these projects total $1,000,000.
What is the opportunity cost of the eliminated $200,000?
An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action so project A is the opportunity cost.
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