(Capital rationing) The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $18 million. The projects are independent and have the costs and profitability indexes associated with them shown in the popup window:

PROJECT COST PROFITABILITY INDEX A 2,000,000 1.12 B 4,000,000 1.05 C 6,000,000 1.31 D 5,000,000 1.39 E 2,000,000 1.15 F 5,000,000 1.24 G 4,000,000 1.19

a. Under strict capital rationing, which projects should be selected?

b. What problems are there with capital rationing?

a. Under strict capital rationing, which projects should be selected?(Select the best choice below.)

A. Projects D, F, and B

B. Projects D, F, G and B

C. Projects C, G, and E

D. Projects D, C, and F

E. Projects D, C, E, and A

b. "Capital rationing may force the firm to reject projects with positive net present values, which is contrary to the firm's goal of maximization of shareholder's wealth, and it is thus not an optimal strategy."

Is the above statement about the capital rationing true or false?

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(NPV calculation) Calculate the NPV given the following cash flows, if the appropriate required rate of return is 13 percent. Should the project be accepted?

YEAR CASH FLOWS 0 -50,000 1 20,000 2 20,000 3 20,000 4 -20,000 5 20,000 6 20,000

What is the project's NPV?

Should the project be accepted?(Select the best choice below.)

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(Discounted payback period) You are considering a project with the following cash flows: If the appropriate discount rate is 9 percent, what is the project's discounted payback period?

YEAR PROJECT CASH FLOW 0 -30,000 1 10,000 2 10,000 3 10,000 4 10,000

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(Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows: If the appropriate discount rate on these projects is 8 percent, which would be chosen and why?

YEAR PROJECT A CASH FLOW PROJECT B CASH FLOW 0 -100,000 -100,000 1 37,000 0 2 37,000 0 3 37,000 0 4 37,000 0 5 37,000 230,000

What is the NPV of project A?

What is the NPV of project B?

Which project would be chosen and why?