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Hi Sir,
First of all thanks a lot for your great service.
*Whats the rule in here, should we select the combination with the highest NPV or the combination that gives the highest return on investment?
*The highest NPV is combination = A+B+D. However its return would be 157/1,500 = 10.46% (remaining funds = $100)
*The combination with the highest return would be B+C+D = 143/1,300 = 11% (remaining funds = $300)
Please explain.
Thanks alot
May God bless you Sir!!The rule in this scenario is to select the combination with the highest NPV. NPV (Net Present Value) is a measure of the profitability of an investment, taking into account the time value of money.
It calculates the present value of cash inflows and outflows associated with an investment. The combination with the highest NPV indicates the investment option that generates the highest overall value. In this case, the combination A+B+D has the highest NPV.
However, it is important to note that the return on investment (ROI) is also a crucial factor to consider.
ROI measures the profitability of an investment relative to its cost. While the combination A+B+D has the highest NPV, the combination B+C+D has a higher ROI.Therefore, the decision ultimately depends on the specific objectives and priorities of the investor.
In this case to maximise profitability of investments, taking into account the time value of money.
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