Your division has been allocated $15M for capital projects for the coming year. You've been able to identify five potential projects, as outlined in the table below, each of which will last 10 years.
|
Project Name
|
Initial Cost
|
Annual Cash Flows
|
Discount Rate
|
|
Alpha
|
8M
|
2M
|
6%
|
|
Bravo
|
7.5M
|
2.25M
|
9%
|
|
Charlie
|
4M
|
0.75M
|
3%
|
|
Delta
|
5M
|
0.6M
|
4%
|
|
Echo
|
2M
|
0.5M
|
10%
|
a. Show the profitability index of each project.
b. Which project(s) should the firm undertake?
c. Which project(s) would the firm undertake if capital is not rationed?