You are in charge of one division of Yeti Surplus Inc.Your division is subject to capital rationing.Your division has 4 indivisible projects available,detailed as follows:

If you must select projects subject to a budget constraint of 5 million dollars,which set of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3
B) Project 1 only
C) Projects 1 and 4
D) Projects 2, 3 and 4

Question

You are in charge of one division of Yeti Surplus Inc.Your division is subject to capital rationing.Your division has 4 indivisible projects available,detailed as follows:

If you must select projects subject to a budget constraint of 5 million dollars,which set of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3 
B) Project 1 only 
C) Projects 1 and 4 
D) Projects 2, 3 and 4

Quizplus · Accepted Answer

The total cost of Projects 1 and 4 is $4.6 million, which is less than the budget constraint of $5 million. 
The total net present value (NPV) of Projects 1 and 4 is $2.6 million, which is greater than the NPV of any other combination of projects. 
Therefore, selecting Projects 1 and 4 will maximize firm value under the given budget constraint.

You Are in Charge of One Division of Yeti Surplus