Portfolio selection and capital rationing Fronzak Ltd serves two related markets and is budgeting its capital expenditures for next year.

Each of Fronzak’s three department heads contributed two investment projects anonymously to the capital budgeting committee (CBC) for final selection decisions. The CBC has gathered information about the annual investment conditions and constraints. The firm’s opportunity cost of capital is 8% per annum, and its annual capital budget is €400000. Details about the six proposed investment projects are shown below.

Required:
1. Compute the net present values of the six investment projects.
2. Use Excel’s Solver to select the optimal portfolio of available projects. Only whole projects may be purchased.
3. Fronzak’s CBC required anonymous contribution of capital projects because the committee wanted to review the projects objectively. What might be gained, what might be lost by this policy? What would you recommend?

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Data Input pportunity cost of capital per annum Capital bud et Euros 8 400 000 Cash Flows In Year Project Market Available 0 2 6 Pro ect 1 A 2 72 000 11 000 11 770 12 5 4 13 475 14.41 15 428 16 508 17 664 Pro ect 2 A 1 157 000 22 500 24 075 25 760 27 563 2 4 3 31 557 33 766 36 130 Pro ect 3 A 3 5 000 8.600 202 846 10 535 11 273 12 062 12 06 13 810 Pro ect 4 B 1 70 000 12 000 12 600 13 230 13 8 2 14 586 15 315 16 081 16 885 Pro ect 5 B 2 78 000 11 750 12 338 12 54 13 602 14 282 14 6 15 746 16 533 Pro ect 6 B 1 110 000 18 600 1 530 20 507 21 532 22 608 23 73 24 26 26 172