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    Capital Budgeting Models

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    The manufacturing department of Holmes Manufacturing Company must choose from six capital budgeting proposals outlined below. The department is subject to capital rationing and it has a budget ceiling of 1,000,000. The company's cost of capital is 15%. Using the criteria of IRR and NPV below, which projects should the department choose?

    Project Initial Cost IRR NPV
    1 $200,000 19% $100,000
    2 $400,000 17% 20,000
    3 $250,000 16% 60,000
    4 $200,000 12% -5,000
    5 $150,000 20% 50,000
    6 $400,000 15% 150,000

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    Solution Preview

    NPV Criteria

    Highest NPV is $150,000 for Project 6. It should be selected first. Capital employed till now=$400,000

    Next highest NPV is $100,000 for Project 1. It should be selected next. Capital employed till now=$400,000+$200,000=$600,000

    Next highest NPV is $60,000 for Project 3. It should be selected next. Capital employed till ...

    Solution Summary

    Solution selects the appropriate projects based upon NPV and IRR models.

    $2.19

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