Waching daily Dec 27 2017

Okay so the question said "Can we maximize the NPV" by investing 10,000,000

assuming that project E, which is this project here assuming that has NPV

of 0 but it must be taken, okay and it says all 5 projects have a

project life 4 years and A,B,C,D, they're all divisible so as they're

divisible we can use a profitability index and the profitability index is

simply the NPV divided by the investment so 1,000,000 / 2.5 is 0.4

1,550,000 / 2,200,000 = 0.705

project C- 1,350,000 / 2,600,000 = 0.519, project D 1,500,000 / 1,900,000 = 0.789

Okay now we can rank them.

Well we have to do "E" to put that as number 1 and then you say well

which gives me the next highest, which is D, which gives me the next highest after

that B, exercise after that, D and the worst is that one there, 5!

Okay, but it saves that project B

and D are mutually exclusive so we can't do B and D together okay so which one

are you going to choose would you choose B or D hopefully you'd say "I'd choose D" this

is the second best so project B disappears. Okay so we have

our rankings and now we just work out the the amount that we have. So we have

10,000,000 to spend okay and we said right, first of all we have to

do project E which will cost me 5,000,000 that will leave me with 5,000,000

left and that will get me an NPV unfortunately of nothing. Okay next I

would do project that was done project D so project D that

will cost me 1,900,000 which would leave me then with 3,100,000 still to

spend and project D will give me an NPV of 1,500,000 so far so good.

What would I do next? I would then choose project C. So project

C comes along and that gives me a cost of 2.6 million, leaving me with just

500,000 still to spend and that 2.6 million will get me an NPV of 1,350,000

and then finally because it's divisible I can do some a project a I can't do it

all up because it cost me 2,5 million but I've got 500,000

so I've spent 500,000 on it

so I'm spending 500,000. I'm doing 500,000 of the

2.5 thousands which hopefully you can see I'm going to do a 5th a

project A because it's divisible so therefore the net present value that

that will get me is not the full 1 million but a fifth of the 1 million

isn't it I'm only doing the fifth in the project so I am only going to get a fifth of the

NPV so 0.05 of that is 200,000 add all that down and that is my maximum

NPV I could get which I think comes to

3,050,000 I think, yeah 3,050,000 oh that's the maximum NPV that I could get spending

the 10,000,000, okay, that's how it's done folks!