29 The following questions pertain to the Star Oil capital budgeting example of Section 3.6. The LINDO

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29 The following questions pertain to the Star Oil capital budgeting example of Section 3.6. The LINDO output for this problem is shown in Figure 16.

a Find and interpret the shadow price for each constraint.

b If the NPV of investment 1 were $5 million, would the optimal solution to the problem change?

c If the NPV of investment 2 and investment 4 were each decreased by 25%, would the optimal solution to the problem change? (This part requires knowledge of the 100% Rule.)

d Suppose that Star Oil’s investment budget were changed to $50 million at time 0 and $15 million at time 1. Would Star be better off? (This part requires knowledge of the 100% Rule.)

e Suppose a new investment (investment 6) is available.

Investment 6 yields an NPV of $10 million and requires a cash outflow of $5 million at time 0 and $10 million at time 1. Should Star Oil invest any money in investment 6?

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