Reference no: EM132712197
Problem - The Chief Financial Officer of Eaton Medical Devices has determined that the firm's capital investment budget will be $5,000,000 for the upcoming year. Unfortunately, this amount is not sufficient to cover all of the positive NPV projects available to the firm.
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Project
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Cost
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NPV
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A
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$1,061,191
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$122,737
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B
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561,758
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58,102
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C
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1,647,849
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280,660
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D
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1,026,020
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89,365
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E
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191,870
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17,568
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F
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1,333,625
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76,960
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G
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3,102,642
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123,240
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H
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275,568
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79,367
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I
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2,044,070
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60,506
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J
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1,017,567
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56,690
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You have been asked to choose which investments should be made.
Required -
a. Using the Solver, determine which of the above projects should be included in the budget if the firm's goal is to maximize shareholder wealth. (Note: Set the Solver to use the Simplex LP method, and turn off the Ignore Integer Constraints setting.)
b. Now assume that the CFO has informed you that projects A and B are mutually exclusive, but one of them must be selected. Change your Solver constraints to account for this new information and find the new solution. (Use the same options as in part a)
c. Ignore the constraints from part b. The CFO has now informed you that Project I is of great strategic importance to the survival of the firm. It must be accepted. Which projects should be accepted?
d. Explain why the different constraints in parts a, b, and c cause different results. Which one results in the highest total investment? Which one has the highest overall NPV?
e. If you rank the projects by profitability index and then select them until you reach a total cost near $5,000,000 do you get the same results as when optimizing by NPV? Use the Rank. Avg function to rank the projects by profitability index in descending order.
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