In the alternatives section you work out the NPV of all four possible combinations. It appears to me there is a quicker method: calculate the NPV of A, B, C and D individually, then select the projects with the three highest NPVs. Are there circumstances when this would not be appropriate?
Thanks
H
Harry·
How come in part (b) of the question, we work out the NPV per $ of initial investment for the ranking - This is because for a divisible project we need to apply the Profitbability Index approach.
but in park (c) we just use the total NPV of the three investments, not the NPV per $ of initial investment - This is because for a non-divisible project you can only invest in projects in full and no fractions.
The rankings are different because the two approaches are independent to eachother
Hope that helps
M
millie4498·
Hi,
How come in part (b) of the question, we work out the NPV per $ of initial investment for the ranking, but in park (c) we just use the total NPV of the three investments, not the NPV per $ of initial investment.
The two different ways give different rankings, therefore different answers.
In the alternatives section you work out the NPV of all four possible combinations. It appears to me there is a quicker method: calculate the NPV of A, B, C and D individually, then select the projects with the three highest NPVs. Are there circumstances when this would not be appropriate?
Thanks
but in park (c) we just use the total NPV of the three investments, not the NPV per $ of initial investment - This is because for a non-divisible project you can only invest in projects in full and no fractions.
The rankings are different because the two approaches are independent to eachother
Hope that helps
How come in part (b) of the question, we work out the NPV per $ of initial investment for the ranking, but in park (c) we just use the total NPV of the three investments, not the NPV per $ of initial investment.
The two different ways give different rankings, therefore different answers.
Thanks