Thanks narendrancima for helping other students with this. You are exactly right – the key here is that all projects are Indivisible so need to try different combinations until you find highest combined NPV which also has combined cost which is less or equal to the intial outlay amount of $350. The best combo is RR & QQ which is affordable ( costs $345) and has the highest combined NPV of $365,000

Other options – as stated by Narendrancima notes are: PPQQ which is affordable but produces a lower NPV than RR&QQ the combination of PPRR is not affordable and exceeds the $350,000 limit.

OpenTuition’s answer to this question is incorrect. Project C’s Profitability Index is greater than Project D’s. Therefore the correct Answer is: Project A NPV £125,00 Project B NPV £105,00 Project C NPV £130,00 Total NPV £360,00

This is greater than the £350,000 NPV if B,A & 75% of D is selected.

Profitability Index are used when projects are divisible. Indivisible projects uses a more “common sense” kinda rule. As in choosing a combination of projects that generate the highest NPV.

Highest here is Project RR with an NVP of (250k-172k) 210,000. This has an investment of 200,000. But with a limit of 350,000 investment, The combination of project the gives the highest NPV are Projects RR and QQ (Total Investment = 345,000 and NPV = 365,000) PP+QQ give a lesser NPV and so does PP+RR. The latter even exceeds the total investment (375,000)

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Cath says

Thanks narendrancima for helping other students with this.

You are exactly right – the key here is that all projects are Indivisible so need to try different combinations until you find highest combined NPV which also has combined cost which is less or equal to the intial outlay amount of $350.

The best combo is RR & QQ which is affordable ( costs $345) and has the highest combined NPV of $365,000

Other options – as stated by Narendrancima notes are:

PPQQ which is affordable but produces a lower NPV than RR&QQ

the combination of PPRR is not affordable and exceeds the $350,000 limit.

benwhittington says

OpenTuition’s answer to this question is incorrect.

Project C’s Profitability Index is greater than Project D’s.

Therefore the correct Answer is:

Project A NPV £125,00

Project B NPV £105,00

Project C NPV £130,00

Total NPV £360,00

This is greater than the £350,000 NPV if B,A & 75% of D is selected.

tbeedham says

project A, C are incompatible so can only chose one of them

Cath says

Thanks for this – correctly spotted & thanks for helping

narendrancima says

Profitability Index are used when projects are divisible. Indivisible projects uses a more “common sense” kinda rule. As in choosing a combination of projects that generate the highest NPV.

Highest here is Project RR with an NVP of (250k-172k) 210,000. This has an investment of 200,000. But with a limit of 350,000 investment, The combination of project the gives the highest NPV are Projects RR and QQ (Total Investment = 345,000 and NPV = 365,000) PP+QQ give a lesser NPV and so does PP+RR. The latter even exceeds the total investment (375,000)

narendrancima says

Sorry, a slight mistake there. Can’t edit it either ._.

Project RR NPV of 210,000 coming from (410-210), and not (250-172).

narendrancima says

Not sure what’s wrong with my keyboard today lol. Kinda wish there was an edit option here. 410-200 = 210.