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Project selection

The following investment opportunities are available to an investment center manager.

Project Initial Investment Annual Earnings
A $800,000 $90,000
B $100,000 $20,000
C $300,000 $25,000
D $400,000 $60,000

a. If the manager currently makes a return of 16%, which project(s) would the manager want to pursue?

b. If the cost of capital is 10% and the annual earnings approximate cash flows excluding finance charges, which project(s) should be chosen?

c. Suppose only one project can be chosen and the annual earnings approximate cash flows excluding finance charges, which project should be chosen?

Solution Preview

a. We calculate the return on investment for each of the projects.
Return on investment = Annual Earnings/Initial Investment
Project A = 90,000/800,000 = 11.25%
Project B = 20,000/100,000 = 20%
Project C = 25,000/300,000 = 8.33%
Project D = 60,000/400,000 = 15%
The current return is 16%. Manager would ...

Solution Summary

The solution explains how to select a project from the given projects

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