Question 1 Kata Ltd can invest in the projects below. Its capital budget is, however limited to $2 000 000. The company’s cost of capital is 13%. Project Initial investment NPV (net present value) A $600,000 168,000 B 400,000 20,000 C 200,000 50,000 D 1 800,000 180,000 E 1 000,000 140,000 F 200,000 100,000 G 1 600,000 320,000 Required: a) Which projects should the company accept if the projects are divisible? b) Select the optimal group of projects the company should accept if the projects are indivisible? c) State the difference in NPV terms between project divisibility and project indivisibility?
Question 1
Kata Ltd can invest in the projects below. Its capital budget is, however limited to $2 000 000. The company’s cost of capital is 13%.
|
Project |
Initial investment |
NPV ( |
|
A |
$600,000 |
168,000 |
|
B |
400,000 |
20,000 |
|
C |
200,000 |
50,000 |
|
D |
1 800,000 |
180,000 |
|
E |
1 000,000 |
140,000 |
|
F |
200,000 |
100,000 |
|
G |
1 600,000 |
320,000 |
Required:
a) Which projects should the company accept if the projects are divisible?
b) Select the optimal group of projects the company should accept if the projects are indivisible?
c) State the difference in NPV terms between project divisibility and project indivisibility?
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