Question 6 Youre a corporate CEO and you have 3 positive NPV

Question 6: You\'re a corporate CEO and you have 3 positive NPV projects presented to you. Discuss how you are going to proceed with these projects. How do limited resources and/or competing assets fit into your analysis? Does IRR have any role here? How would you prioritize the projects...or do you even need to? Question 2: You have an opportunity to purchase a Magic Box. The Magic Box spits out a crisp $50 bill every year on the anniversary of the purchase date...forever. As an added bonus it also spits out a $100 bill on the purchase date. Your discount rate is 6%. What is the most you would pay for the box? How much would you pay for the Box if it stops working after the 25th payment? Provide a real-world example of a business that closely resembles a Magic Box.

Solution

I can only answer 1 question at a time so I am answering Question 6.

We have 3 positive NPV projects but that doesn\'t mean that we can start all the 3 projects simultaneously. It depends on many other factors like available resources, available assets, IRR of each project. We first need to arrange the projects in decreasing order of NPV. Then we have to see if available resources and assets are enough for starting the projects. We also need to see the effect of Internal Rate of Return(IRR). Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and be undertaken first.. Hence, we need to prioritize the projects. We can also see the effect of taking two projects at a time and calculating their combined NPV, IRR and use of resources.

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