Question
Case Scenario: You managed a business unit called Happy Toy that made interlocking plastic brick sets. The company has given you a budget of $5
Case Scenario: You managed a business unit called Happy Toy that made interlocking plastic brick sets. The company has given you a budget of $5 million to spend on capital investment projects. Happy Toy's management team had lots of ideas and had recommended 5 projects for the company (Table A).
Table A. Proposed Projects (in million US dollars)
| Project | Required Investment (I) | Present Value of Expected Cash Flow (PV) | NPV = PV I |
| Noahs Ark | 4.0 | 7.0 | 3.0 |
| Statue of Liberty | 2.0 | 4.0 | 2.0 |
| Barney & Friends | 2.0 | 3.75 | 1.75 |
| Fish Tank | 1.0 | 2.5 | 1.5 |
| Poodle | 1.0 | 1.5 | 0.5 |
| Total | 10.0 | 18.75 | 8.75 |
Question 1 You have a $5 million budget from the company to invest in the projects. Based on the NPV investment rule, rank these competing investment projects from high to low. Complete Table B and answer questions (1a) and (1b).
(1a) Suppose these projects are independent[i], which project(s) will you choose to fund given the $5 million budget constraint? Why?
(1b) Suppose these projects are mutually exclusive[ii], which project(s) will you choose to fund given the $5 million budget constraint? Why?
Table B. Use NPV to Assess Competing Projects (in million US dollars)
| Project | Required Investment (I) | Present Value of Expected CF (PV) | NPV = PV I | Rank Order Projects Using NPV |
| Noahs Ark | 4.0 | 7.0 | 3.0 | |
| Statue of Liberty | 2.0 | 4.0 | 2.0 | |
| Barney & Friends | 2.0 | 3.75 | 1.75 | |
| Fish Tank | 1.0 | 2.5 | 1.5 | |
| Poodle | 1.0 | 1.5 | 0.5 | |
| Total | 10.0 | 18.75 | 8.75 |
Question 2 Budget constraint remains unchanged at $5 million. You decided to apply another investment decision rule that you learn in Module 4 class video.
(2a) Which other investment rule can you use? Rank order the five competing investment projects. Complete Table C.
(2b) Suppose these projects are independent, which project(s) will you choose to fund given the $5 million budget constraint? Why?
(2c) Suppose these projects are mutually exclusive, which project(s) will you choose to fund given the $5 million budget constraint? Why?
Table C Use Another Investment Rule to Assess Competing Projects (in million US dollars)
| Project | Required Investment (I) | Present Value of Expected Cash Flow (PV) | Computed Value of Your Investment Rule | Rank Orer Projects Using Your Investment Rule |
| Noahs Ark | 4.0 | 7.0 | ||
| Statue of Liberty | 2.0 | 4.0 | ||
| Barney & Friends | 2.0 | 3.75 | ||
| Fish Tank | 1.0 | 2.5 | ||
| Poodle | 1.0 | 1.5 | ||
| Total | 10.0 | 18.75 |
Question 3 What if you were only given a $4.0 million budget and the projects are independent?Using the NPV investment rule first and then your other investment rule, which project(s) will you choose to fund? Are they different than your answer to questions 1 and 2? Why or why not?
(3a) [$4 million budget, NPV Rule] Answer and rationale: ___________________________
(3b) [$4 million budget, Other Investment Rule] Answer and rationale: _______________________
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
International Financial Management
Authors: Cheol Eun, Bruce Resnick
5thEdition
0073382345, 9780073382340
