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Ford Allen, CEO of the Amstelveen Corporation, has some major decisions to make. Seven division managers are clamoring for investment in projects totaling 34,000,000. Allen

Ford Allen, CEO of the Amstelveen Corporation, has some major decisions to make. Seven division managers are clamoring for investment in projects totaling 34,000,000. Allen is working to fund them all, but currently only has 8,000,000 available for Amstelveen to invest.

Proposals (all amounts in thousands)

Project

A

B

C

D

E

F

G

Initial Investment

1,000

2,000

8,000

5,000

5,000

10,000

3,000

Annual cash flows

Year 1

500

1,500

2,000

4,800

2,000

3,000

1,500

Year 2

1,000

1,000

2,000

1,000

3,000

2,000

1,200

Year 3

500

300

8,000

6,000

5,000

1,500

400

Year 4

1,000

500

2,000

-3,000

1,000

2,000

Year 5

1,500

200

2,500

-4,000

3,000

3,000

Amstelveens cost of capital is 7%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value.

Allen has tasked you, an employee in the corporate controllers office, with several tasks.

First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue. Calculate this using the four methods of calculating capital budgeting that we covered in class. If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria.

Second, give the recommended total that you suggest Amstelveen raise, in addition to the 8,000,000 it already has, in order to invest in your recommended projects.

Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to 8,000,000. Make sure to clearly explain the basis for your recommendation.

Note: you cannot recommend abandoning Project D when it becomes negative in Year 4

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