Project selection : explained
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?