Question

A company has only $40 million to spend on all its capital projects for the current year. However, based on management's analyses, the company would require $50 million to invest in all its positive Net Present Value (NPV) projects. All the projects are independent (none are mutually exclusive).

What is the most appropriate decision in this situation?
a. Accept all projects regardless of the funding shortfall.
b. Reject all projects due to the funding shortfall.
c. Select projects based on their profitability and prioritize funding for the most lucrative ones.
d. Seek additional funding to cover the shortfall before making any decisions.

Answer 1

The company should prioritize the most profitable projects to utilize the available $40 million effectively. They should also contemplate securing additional capital to fund more of their positive NPV projects efficiently.

Step-by-step explanation:

In the given scenario, where a company has a budget of $40 million but requires $50 million to fund all its projects with a positive Net Present Value (NPV), the most appropriate decision would be: c. Select projects based on their profitability and prioritize funding for the most lucrative ones. This method allows for the optimal use of the limited capital by ensuring that the projects with the highest potential returns are pursued, potentially maximizing the company's profits.

Additionally, while not mentioned in the options, the company could consider looking for additional capital sources as these would allow for funding more or all the positive NPV projects. Potential sources of capital include:

• Attracting early-stage investors
• Reinvesting profits
• Borrowing through banks or bonds
• Selling stock