Question 9

You have been appointed as a Project Manager for Maya Construction Company. The company is about to select a group of independent projects competing for the companys capital budget of $6.0 million. The firm recognized that its cost of capital is 14%. The company Chief Executive Officer (CEO) has given you the summarized key information (refer to Table 4.1) to be used in selecting the best group of projects.

Table 4.1 Project Information Project	Initial Investment	Internal Rate of Return (IRR)	Present Value (PV) of Inflows at 14%
A	$7,500,000	16%	$7,600,000
B	$ 650,000	17%	$ 950,000
C	$1,800,000	15%	$2,100,000
D	$1,450,000	20%	$1,700,000
E	$ 950,000	25%	$1,150,000
F	$2,400,000	21%	$2,800,000
G	$1,200,000	22%	$1,500,000
H	$ 900,000	19%	$1,000,000

Required:

1) What is capital rationing? In theory, should capital rationing exist? Why does it frequently occur in practice?

2) Apply the internal rate of return (IRR) approach to select the best group of projects.

3) Apply the net present value (NPV) approach to select the best group of projects.

4) Which projects should you recommend to be implemented by the company?