Effect of Constraints on Investment Decisions: Carbondale and Company, a medical partnership, has $1.5 million available for investment in venture capital projects. The cost of capital is 18 percent. As a partnership, Carbondale pays no income taxes. The following opportunity ventures are available. Each has an estimated seven-year life.

A. Software Designs, an innovative software development company, has requested $900,000. The firm estimates no returns until Year 5. Years 5 through 7 should return $1 million per year.

B. Sunset Mall, a new shopping center development, will cost Carbondale $550,000. The project will return $65,000 per year for each of Years 1-3 and $250,000 per year in Years 4-7.

C. Nutri-care, a health food chain, requires an investment of $650,000 to open a new store. This project will return $260,000 in each of Years 1-3 and $60,000 per year in Years 4-7.

D. Marvin Gardens, a housing development, would require $850,000 and return $250,000 in each of Years 1-7.

Required: Complete the following schedule (dollars in thousands) to:

a. Calculate the net present value index for each investment

b. Determine how the company can optimally invest its venture capital funds. Assume no other constraints on investment.

Transcribed Image Text:

Year 0 1 7 ($ $ $ $ 0.847 0.370 .314 ($ S $ $ $ Project A: Amounts PV factor Present values Net present value Net present value index D: Amounts PV factor Present values Net present value Net present value index A 69 ($ ) $ $ $ 0.847 0.370 .314 ($ $ $ $ $ % S