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Capital Rationing

8. The general manager of the Western Tool Company is considering introducing some new tools to the company's product line. The top management of the firm has identified three types of tools (referred to as Project A, B, and C). The various divisions of the firm have provided the data given in the following table on these three possible projects. The company has a limited capital budget of $2.4 million for the coming year.
(a) Which project(s) would the firm undertake if it used the NPV investment criterion?
(b) Is this the correct decision? Why?
Project A Project B Project C
Present value of net cash flows (PVNCF) $3,000,000 1,750,000 1,4000,000
Initial cost of project $2,400,000 1,300,000 1,100,000

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8. The general manager of the Western Tool Company is considering introducing some new tools to the company's product line. The top management of the firm has identified three types of tools (referred to as Project A, B, and C). The various divisions of the firm have provided the data given in the following table on these three possible projects. The company has a limited capital budget of $2.4 million for the coming year.
(a) Which project(s) would the firm undertake if it used the NPV investment criterion?
(b) Is this the correct decision? Why?
Project A Project B Project C
Present value of net cash flows (PVNCF) $3,000,000 1,750,000 1,400,000
Initial cost of project $2,400,000 ...

Solution Summary

Determines the projects to choose based on NPV criterion when there are limied funds available.

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