Capital Rationing
8. The general manager of the Western Tool Company is
considering introducing some new tools to the company’s product line. The top
management of the firm has identified three types of tools (referred to as
Project A, B, and C). The various divisions of the firm have provided the data
given in the following table on these three possible projects. The company has
a limited capital budget of $2.4 million for the coming year.
(a) Which project(s) would the firm undertake if it used the
NPV investment criterion?
(b) Is this the correct decision? Why?
Project A Project
B Project C
Present value of net cash flows (PVNCF) $3,000,000 1,750,000 1,4000,000
Initial cost of project $2,400,000 1,300,000 1,100,000
Categories: