# If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made

University of Phoenix. Business For Finance. Week 4 Assignment.April 2011FINANCIAL MANAGEMENT – PRINCIPLES AND APPLICATIONS CHAPTER 10INTEGRATIVE PROBLEM11. Caledonia is considering two investments with one-yearlives. The more expensive of the two is the better and will producemore savings. Assume these projects are mutually exclusive and thatthe required rate of return is 10 percent. Given the followingafter-tax net cash flows: YEAR PROJECT A PROJECT B 0 –\$195,000–\$1,200,000 1 240,000 1,650,000A. Calculate the net present value.B. Calculate the profitability index.C. Calculate the internal rate of return.D. If there is no capital-rationing constraint, which projectshould be selected? If there is a capital-rationing constraint, howshould the decision be made?
A. Calculate the net present valueNPV Project A= -195000 + (240000/1.10) = -195000 + 218182 =\$23,182NPV Project B= -1200000 + (1650000/1.10) = -1200,000 + 1500,000= 300,000

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