Question
Costcutters Corp. is considering 3 projects, A, B, and C. The cash flows for each project are shown in the table below. If the cost
Costcutters Corp. is considering 3 projects, A, B, and C. The cash flows for each project are shown in the table below. If the cost of capital is 16%, these projects are independent of each other but the company has only $40,000 to invest, which project(s) should the company invest in and why? (Hint: use the capital rationing/profitability index criteria)
| Year | Project A: CF | Project B: CF | Project C: CF |
| 0 | -40,000 | -40,000 | -40,000 |
| 1 | 13,000 | 7,000 | 19,000 |
| 2 | 13,000 | 10,000 | 16,000 |
| 3 | 13,000 | 13,000 | 13,000 |
| 4 | 13,000 | 16,000 | 10,000 |
| 5 | 13,000 | 19,000 | 7,000 |
| A. Only, as it has a profitability index of 6.41% and the capital is limited | ||
| B. Only, as it has a profitability index of 0.81% and the capital is limited | ||
| C. Only, as it has a profitability index of 13.64% and the capital is limited | ||
| A and C, as both have a positive profitability index |
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Health Care Finance Basic Tools For Nonfinancial Managers
Authors: Judith Baker
2nd Edition
0763726605, 9780763726607
