Ford Allen, CEO of the Amstelveen Corporation, has some major decisions to make. Seven division managers are clamoring for investment in projects totaling €34,000,000. Allen is working to fund them all, but currently only has €8,000,000 available for Amstelveen to invest. 

Proposals (all amounts in € thousands)
	Project	A	B	C	D	E	F	G
Initial Investment		1,000	2,000	8,000	5,000	5,000	10,000	3,000
Annual cash flows	Year 1	500	1,500	2,000	4,800	2,000	3,000	1,500
	Year 2	1,000	1,000	2,000	1,000	3,000	2,000	1,200
	Year 3	500	300	8,000	6,000	5,000	1,500	400
	Year 4	1,000	500	2,000	-3,000	1,000	2,000
	Year 5	1,500	200	2,500	-4,000	3,000	3,000

Amstelveen’s cost of capital is 7%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value. Allen has tasked you, an employee in the corporate controller’s office, with several tasks.

First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue.  Calculate this using the four methods of calculating capital budgeting that we covered in class. If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria.

Second, give the recommended total that you suggest Amstelveen raise, in addition to the €8,000,000 it already has, in order to invest in your recommended projects.

Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to €8,000,000. Make sure to clearly explain the basis for your recommendation.

Answer rating: 100% (QA)

Ans Present Value PV of Cash Flow Cash Flow1iN iDiscount RateCost of Capital7007 NYear of Cash Flow ... View the full answer