A firm has a capital budget of $30,000 and is considering three possible independent projects. Project A has a present outlay of $12,000 and yields $4,281 per annum for 5 years. Project B has a present outlay of $10,000 and yields $4,184 per annum for 5 years. Project C has a present outlay of $17,000 and yields $5,802 per annum for 10 years. Funds which are not allocated initially to one of the projects can be placed in a bank deposit where they will earn 15%. Project returns can be reinvested at the specified reinvestment rate.

i Identify six combinations of project investments and a bank deposit which will exhaust the budget.

ii Using a spreadsheet, determine which of the above project combinations the firm should choose:

a when the reinvestment rate is 15%?

b when the reinvestment rate is 20%?

Explain your answer and show your calculations (spreadsheet printout is acceptable as long as entries are clearly labelled). (Hint: compound forward the returns of each combination at the reinvestment rate to get a Terminal Value in year 10.)