Sara Sump managed a business unit called Happy Spoon that made and marketed recycled eating utensils. The corporate office had given her business unit a budget that included an upper limit of $5 million to spend on capital investment projects. The team had recommended 5 initiatives for building the business.

Profitability Index associated with proposed projects (in millions of US dollars)

Project	ReQuired Investment (I)	Present Val of Expected Cash Flow (PV)	NPV (PV-I)
Fabulous Fork Project	4.0	7.0	3.0
Fiber Tech	2	4	2
Western Expansion	2	3.75	1.75
Production Efficiency	1	2.5	1.5
Wonder Spoon	1	1.5	0.5
Total	10	18.75	8.75

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QUESTION: In this case study, $5 million is initially given to invest. But in reality, we could reinvest some part of the cash generated by the project we invested in initially. Would it efffect or change our current Profitability Index (PI) project ranking? If so, how? What additional information do you need for computing the ranking?

While Sump believed there were strong reasons to invest in all five projects, she appreciated that the total capital needed to do so$10.0 millionwas well beyond her capital budget of $5 million. Her team had recommended that the $5.0 million budget be allocated to the Fabulous Fork and Production Efficiency projects. This was because the $4.0 million Fabulous Fork project had the highest NPV at $3.0 million, and the Production Efficiency project had the highest NPV at $1.5 million of the two projects that fit within her remaining budget of $2.0 million. By selecting these two projects, Sump expected to generate economic value of $4.5 million (53.0 million + $1.5 million). But she was convinced that she could do better. That afternoon, Sump explained her woes to her spirited hairdresser, Sofia Dinero. Dinero understood the problem immediately. "Bang for your buck!," announced Dinero convincingly with a particularly strong snip of her scissors. She continued, That's what you are trying to figure out. Bang for your buck! You simply need to scale what you are getting by what you are paying. Like for dinner tonight, I'm thinking about either fish or chicken. For chicken, I can get one pound for $3, but for fish I can get two pounds for $4. Since I have a ravenous family and a limited budget, the bang for the buck (dollar) is better with the fish ($0.5] than the chicken [$0.33)So yes, I'll be serving big bang fish for dinner tonight Dinero was highly animated as she finished making her point and punctuated her obvious astuteness with another fierce slash of her scissors. Dinero then left Sump to ponder this enlightening principle. Sump continued to ponder the bang-for-your-buck principle that night after her own fish dinner. Sump divided the present value of the cash flow (the "bang") for each project by the required investment (the "buck") to obtain what she called the profitability index" (see Table 2). Table 2. Profitability index associated with proposed projects (in millions of US dollars). Project Required Investment Present Value of Expected Profitability Index 0 Cash Flow (PV) (PV / D Fabulous Fork project 4.0 7.0 Fiber Technology project Western Expansion project 3.75 Production Efficiency project 2.5 Wonder Spoon project 1.0 1.50 The profitability index (PI) calculations suggested a different ranking than what Sump had assumed by simply looking at the NPV. When scaled by its required investment, the Fabulous Fork project, for example, with a PI of 1.8, looked much less attractive. This was because the strong benefits were scaled by the large amount of required capital. The PI suggested a different ranking the Production Efficiency project maintained the largest bang for the buck at a PI of 2.5, followed by the Fiber Technology project with a PI of 2.0, and the Western Expansion project with a PI of 1.9. By authorizing these three projects, Sump anticipated a total value gain of $5.25 million ($1.5 million NPV for the Production Efficiency project + $2.0 million NPV for the Fiber Technology project + $1.75 million for the Western Expansion project]. Sump's business unit was economically better off with these three projects, since the $5.25 million with the three projects exceeded the $4.5 million she would have generated with the first set of two projects. 4.0 2.0 2.0 1.0 1.8 2.0 1.9 2.5 1.5