Change the capital budgeting model in Figure 6.5 so that 80% of each cost in row 5 is incurred right now, at the beginning of year 1, and the other 20% is incurred a year from now, at the beginning of year 2. You can assume that the NPVs don’t change. The available budget in year 1 is $11.5 million, and the budget in year 2 is $3.5 million.

a. Assuming that available money un-invested in year 1 cannot be used in year 2, what combination of investments maximizes NPV?

b. Suppose that any un-invested money in year 1 is available for investment in year 2. Does your answer to part a change?

Figure 6.5:

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Capital Budgeting Model Н G. 1 Capital budgeting model Range names used Budget Decisions =Model!$B$10:$H$10 Total_cost=Model!$B$14 Total_NPV=Model!$B$17 =Model!$D$14 3 Input data on potential investments ($ millions) 4 Investment 5 |Cost 2 $2.4 $2.7 12.5% 3 $3.5 $3.9 11.4% 4 $6.9 $4.5 $5.9 $6.8 15.3% $5.0 $5.6 $3.0 $3.3 10.0% 6 NPV 7 ROI $7.7 $5.1 13.3% 12.0% 11.6% 9 Decisions: whether to invest 10 1 if yes, 0 if no 11 1. 12 Budget constraint Total cost $14.9 13 14 Budget $15 15 | 16 Objective to maximize | 17 Total NPV $16.7