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The Suboptimal Glass Company uses a process of capital rationing in its decision making
The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm's cost of capital is 12 percent. It will invest only $65,400 this year. It has determined the IRR for each of the following projects:
ProjectProject SizeInternal Rate
of ReturnA$10,100 12.0%B20,100 12.5 C25,100 13.5 D10,100 14.0 E10,100 22.0 F20,100 15.0 G10,100 10.0
a. Pick out the projects that the firm should accept. (You may select more than one answer. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.)
check all that apply 1
- Project B
- unanswered
- Project A
- unanswered
- Project D
- unanswered
- Project F
- unanswered
- Project E
- unanswered
- Project G
- unanswered
- Project C
- unanswered
b. If projects E and F are mutually exclusive, how would that affect your overall answer? That is, which projects would you accept in spending the $65,400? (You may select more than one answer. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.)
check all that apply 2
- Project B
- unanswered
- Project A
- unanswered
- Project D
- unanswered
- Project F
- unanswered
- Project E
- unanswered
- Project G
- unanswered
- Project C
Expert Solution
| Project | Project Size | IRR | Ranking / Preference |
| A | 10100 | 12% | 6 |
| B | 20100 | 12.5% | 5 |
| C | 25100 | 13.50% | 4 |
| D | 10100 | 14% | 3 |
| E | 10100 | 22% | 1 |
| F | 20100 | 15% | 2 |
| G | 10100 | 10% | Not to Invest |
Cost of Capital = 12%
We do not consider Project G, as its IRR is less than the Cost of Capital.
Investing in Project F results in Loss.
a)
| a. | Preference | Project | Project Size | Balance |
| Investment available | 65400 | |||
| 1 | E | 10100 | 55300 | |
| 2 | F | 20100 | 35200 | |
| 3 | D | 10100 | 25100 | |
| 4 | C | 25100 | 0 |
So, Projects E, F, D and C are accepted.
b) If Projects E and F are Mutually exclusive, only one among B and G can be accepted.
As E is having IRR higher when compared to F, E should be accepted. Which implies F should be rejected.
So, Projects E, D, C and B are accepted.
| b. | Preference | Project | Project Size | Balance |
| Investment available | 65400 | |||
| 1 | E | 10100 | 55300 | |
| 2 | F | Can't be invested | 55300 | |
| 3 | D | 10100 | 45200 | |
| 4 | C | 25100 | 20100 | |
| 5 | B | 20100 |
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