Due to external factors, the directors have unanimously chosen to limit the capital spending budget for $2023$ to SEK $1\mathrm{.}7$ billion $($SEK is Swedish Kronor$).$ The SEK $3\mathrm{.}2$ billion total cost for all eleven proposals does exceed the constrained capital budget for $2023.$ The company policy is driven by a goal to maximize shareholder value with its investment policy. The company policy states that capital budgeting tools based on Net Present Value or NPV are the only tools that can measure the amount of shareholder value or wealth created by any project.

As the capital budget is limited to SEK $1\mathrm{.}7$ billion $($SEK $1700$ million$),$ the final capital budgeting decision enacted by the board of directors must choose the optimal collection or bundle of projects that maximize the Net Present Value or wealth created given the limited capital budget of SEK $1\mathrm{.}7$ billion. The Profitability Index $($PI$)$ scales the NPV by the size of the project $($e$.$g$.,$ NPV per $ spent$),$ and is the method to be used to choose the best bundle of projects given the limited capital budget $$ rank projects from highest to lowest PI and choose from the top on down until the budget is consumed.

SL has a formal policy that establishes the risk$-$based cost of capital or discount rate used to analyze projects as shown in the table below. The Excel sheet supplied for this case lists the classification of each proposed project. The Excel sheet also contains the cash flows of every project.

Project Classification Classification or type of project Cost of capital $($hurdle rate$)$

$1$ New product or new markets $12\%$

$2$ Product or market extension $10\%$

$3$ Efficiency improvements $8\%$

$4$ Safety or environmental $10\mathrm{.}5\%($corporate WACC$)$

The eleven proposed projects are listed below. Note that projects no$.6$ and $7$ are mutually exclusive projects $$ see the special note on the following page. Also stated is each project$$s total installed cost $($total initial investment$),$ also broken down into the Plant Property and Equipment $($capital expenditures or PP&E$)$ portion, and the increase in Net Working Capital $($NWC$)$ portion. Cost figures are given in Swedish Kronor $($SEK$).$ For each of the eleven projects, the entire project installation and installed cost $($initial investment$)$ is incurred upfront $($none spreads or spills across to future time periods$).$

$1.$ Purchase new Volvo trucks for the firm$$s transportation distribution network. Total installed cost is SEK $330$ million $(300$ million PP&E and $30$ million NWC$).$

$2.$ New yogurt plant in Malm$$ Sweden to supply markets in Denmark, Germany, Norway, and Sweden. Total installed cost is SEK $450$ million $(375$ million PP&E and $75$ million NWC$).$

$3.$ Expand butter production at the firm$$s plant in Karlstad Sweden. Total installed cost is SEK $150$ million $(125$ million PP&E and $25$ million NWC$).$

$4.$ Herring and misc. seafood production project at the G$$teborg Sweden plant. Total installed cost is SEK $260$ million $(220$ million PP&E and $40$ million NWC$).$

$5.$ Upgrade$/$renovate the firm$$s bakery facility in Stockholm. Total installed cost is SEK $210$ million $($all PP&E$).$

$6.$ Expand the firm$$s existing frozen dessert line $($from production capacity at the G$$teborg$,$ Karlstad, and Malm$$ plants$)$ to serve new markets in Germany and Denmark. Total installed cost is SEK $300$ million $(250$ million PP&E and $50$ million NWC$).$

$7.$ Expand the firm$$s existing frozen dessert line $($from production capacity at the G$$teborg$,$ Karlstad, and Malm$$ plants$)$ to serve new markets in Norway, Finland, and several nations along the Baltic. Total installed cost is SEK $300$ million $(250$ million PP&E and $50$ million NWC$).$

$8.$ Project to produce Swedish meatballs and other food items under contract for IKEA to be sold under the IKEA brand in IKEA stores in Europe. Total installed cost is SEK $270$ million $(225$ million PP&E and $45$ million NWC$).$

$9.$ Information system upgrade for the firm. Total installed cost is SEK $250$ million $($all PP&E$).$

$10.$ Acquisition of an existing Swedish firm that manufactures the Akvavit spirit, schnapps, and liqueurs; offered as a project that delivers higher future growth opportunity than the firm$$s existing mature businesses. Total installed cost is SEK $600$ million $(450$ million PP&E and $150$ million NWC$).$

$11.$ Replace existing outdated lighting and electrical systems in several of the firm$$s production facilities within Sweden. Total installed cost is SEK $80$ million $($all PP&E$).$

Questions to answer for this assignment:

$1.$ For each of the $11$ proposed projects, calculate the project IRR, the $$spread$($difference between IRR and project cost of capital, and the Profitability Index $($PI$)$ P$.$I. being the crucial capital budgeting decision tool in this scenario of a constrained capital budget in Part $2$ below. Then rank the $11$ project proposals on the the both PI and the $$spread$$ between IRR and project hurdle rates. How closely do ranking on PI versus $$spread$$ match each other?

Which set of projects should the board of select for the capital budget for $2023,$ given that the firm$$s capit