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Sir in the question given below in the solution says that as project A is divisible and only $500,000 (20%) of its initial cost is available after cumulative investments in projects E,D and Cand NPV from the project is 20% of$1,000,000
How did they get this percentage?
i’m confused ?The Board of OAP Co has decided to limit investment funds to $10 million for the next year and is preparing its capital
budget. The company is considering five projects, as follows:
Initial investment Net present value
Project A $2,500,000 $1,000,000
Project B $2,200,000 $1,550,000
Project C $2,600,000 $1,350,000
Project D $1,900,000 $1,500,000
Project E $5,000,000
To be calculated
All five projects have a project life of four years. Projects A, B, C and D are divisible, and Projects B and D are mutually
exclusiveI assume that you have watched my free lectures on this and appreciate therefore that the projects are ranked according to their profitability index.
As a result with only 10M available, there is only 500,000 left to invest in A which is 20% (500/2500) of the project. If only 20% is invested then the NPV resulting will only be 20% of the total NPV as well.
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