Use the following information about to help answer problems 12-15:

Assume management's job is to maximize firm value by pursuing as many positive NPV projects as the companys total budget allows. The companys total budget of $9000 comes from $5000 of cash on hand and a revolving credit line of $4000 (if management chooses to use it).

12. Assuming management is willing to use the revolving credit line, sum the NPV of all the projects management will choose to pursue. How much can management increase the firm's value by while adhering to all the constraints?

a. $800 b. $1600 c. $1700 d. $2100 e. $2500

13. Complete the table. Using the 25% cost of capital, how many projects have profitability index greater than zero but less than 1.00?

a. 0 b. 1 c. 2 d. 3 e. 5

14. If the cost of capital increases by 15%, __________ project(s) would have an NPV greater than zero; if the cost of capital decreases by 5%, __________ project(s) would have an NPV greater than zero. Fill in the blanks:

HINT: What happens if the cost of capital is equal to the internal rate of return?

15. The crossover rate between Project I and Project II is closest to:

a. 28.1% b. 28.3% c. 28.5% d. 28.7% e. 28.9%

IRR Profitability Initial Outlay NPV # of FCFS Cost Capital FCF Index (PU) Project $3,300 $900 6 25.0% $1,423 1.27 36.4% $2,000 Project 1 $800 6 25.0% $949 ??? 41.5% $1,800 Project III $500 6 25.0% ??? ??? 36.6% Project IV $1,200 $400 6 25.0% $542 ??? 38.9% Project V $800 $(50) 6 25.0% $254 ??? 22.2% Example: Project I will use $3300 of the company's total budget if accepted. The project produces equal Future Cash flows of $1,423 and the end of every year for the next six years. The project's NPV is $800 using a 25% discount rate. Widget Co. has 3 operating segments (Alpha, Beta, Gamma) and management uses in a soft capital rationing system that limits how much each segment can spend: Max Budget Alpha $4500 Beta $2500 Gamma $2000 For example, Alpha segment can spend up to $4500 Each segment has different manufacturing capabilities and can only complete certain projects: Alpha Beta Gamma Project Yes No Project II Yes No Project III Yes Yes Project IV Project V Yes No No No Yes No No Yes Yes For example, the Alpha segment has the manufacturing capability to complete Projects 1,11,& III, but not Projects IV or V A segments can pursue multiple projects if the segment's budget allows for it A project can only be completed by any segment one time . a. O b. 1 ; ; c. 2 5 5 5 4 4 i d. 0 e. 1 i IRR Profitability Initial Outlay NPV # of FCFS Cost Capital FCF Index (PU) Project $3,300 $900 6 25.0% $1,423 1.27 36.4% $2,000 Project 1 $800 6 25.0% $949 ??? 41.5% $1,800 Project III $500 6 25.0% ??? ??? 36.6% Project IV $1,200 $400 6 25.0% $542 ??? 38.9% Project V $800 $(50) 6 25.0% $254 ??? 22.2% Example: Project I will use $3300 of the company's total budget if accepted. The project produces equal Future Cash flows of $1,423 and the end of every year for the next six years. The project's NPV is $800 using a 25% discount rate. Widget Co. has 3 operating segments (Alpha, Beta, Gamma) and management uses in a soft capital rationing system that limits how much each segment can spend: Max Budget Alpha $4500 Beta $2500 Gamma $2000 For example, Alpha segment can spend up to $4500 Each segment has different manufacturing capabilities and can only complete certain projects: Alpha Beta Gamma Project Yes No Project II Yes No Project III Yes Yes Project IV Project V Yes No No No Yes No No Yes Yes For example, the Alpha segment has the manufacturing capability to complete Projects 1,11,& III, but not Projects IV or V A segments can pursue multiple projects if the segment's budget allows for it A project can only be completed by any segment one time . a. O b. 1 ; ; c. 2 5 5 5 4 4 i d. 0 e. 1