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# Internal Rate of Return/Coefficient of Variation

(This problem is attached for clarity).

1. Oliver Stone and Rock Company uses a process of capital rationing in its decision making. The firm's cost of capital is 12 percent. It will invest only \$80,000 this year. It has determined the internal rate of return for each of the following projects.
Percent of
Internal Rate
Project Project Size of Return
A . . . . . . . . . . \$15,000 14%
B . . . . . . . . . . 25,000 19
C . . . . . . . . . . 30,000 10
D . . . . . . . . . . 25,000 16.5
E . . . . . . . . . . 20,000 21
F . . . . . . . . . . 15,000 11
G . . . . . . . . . . 25,000 18
H . . . . . . . . . . 10,000 17.5

a. Pick out the projects that the firm should accept.
b. If Projects B and G are mutually exclusive, how would that affect your
overall answer? That is, which projects would you accept in spending the \$80,000?

#### Solution Preview

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.

Decisions like the change in the methods of sales distribution, or an advertisement campaign or ...

#### Solution Summary

This solution provides detailed explanations for questions regarding the process of capital rationing in a company's decision making.

\$2.19