QUESTION 1: The Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has allocated $1 million for capital budgeting purposes. The following proposals and associated profitability indexes have been determined. The projects themselves are independent of one another.

PROFITABILITY PROJECT AMOUNT INDEX

1. Extend ski lift 3 $500,000 1.22

2. Build a new sports shop 150,00 0 0.95

3. Extend ski lift 4 350,000 1.20

4. Build a new restaurant 450,000 1.18

5. Build addition to housing complex 200,000 1.19

6. Build an indoor skating rink 400,000 1.05

a. If strict capital rationing for only the current period is assumed, which of the investments should be undertaken? (Tip: If you didnt use up the entire capital budget, try some other combinations of projects, and determine the total net present value for each combination.)

b. Is this an optimal strategy?