Problem: 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
1. Pick out the projects that the firm should accept.
2. 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?