A company working against a self-imposed capital budgeting constraint of Rs 70 crore is trying to decide which of the following investment proposals should be undertaken by it. All these investment proposals are indivisible as well as independent. The list of investments along with the investment required and the NPV of the projected cash flows are given as below:
\, Which investment should be acquired by the company?
NPV\>(Rs\>crore) | Initial\>investment\>(Rs\>crore) | Project |
6 | 10 | A |
18 | 24 | B |
20 | 32 | C |
30 | 22 | D |
20 | 18 | E |
NPV from investments D, E and B is Rs 68 crore with Rs 64 crore utilised leaving Rs 6 crore to be invested in some other investment outlet. No other investment package would yield an NPV of this amount. The company is advised to invest in D, E and B projects.
\, It is important to note that trial and error process constitutes an integral part of selecting optimal investment packagesset in capital ratinoning situation. Consider Example 3.14.