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OAP CO-June 2014-maximum npv

Vvandana9y ago
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 exclusive
John MoffatJohn MoffatTutor9y ago#1
I 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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