general business data bank

| March 14, 2016

6.5 Project Selection with Resource Restraints

1) Which of the following statements is false?

A) If there is a fixed supply of resource available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed.

B) Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources.

C) If there is a fixed supply of resources available, so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision.

D) The profitability index is calculated as the NPV divided by the resources consumed by the project.

2) Which of the following statements is false?

A) The profitability index measures the value created in terms of NPV per unit of resource consumed.

B) The profitability index is the ratio of value created to resources consumed.

C) The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.

D) The profitability index measures the “bang for your buck.”

3) You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

A) IRR

B) Payback period

C) NPV

D) Profitability index

Use the table for the question(s) below.

Consider a project with the following cash flows:

Year

Cash Flow

0

-10,000

1

4,000

2

4,000

3

4,000

4

4,000

4) Assume the appropriate discount rate for this project is 15%. The profitability index for this project is closest to:

A) .14

B) .22

C) .60

D) .15

5) The profitability index for project A is closest to:

A) 0.12

B) 21.65

C) 0.17

D) 12.04

6) The profitability index for project B is closest to:

A) 23.34

B) 12.64

C) 0.17

D) 0.12

Use the table for the question(s) below.

Consider the following list of projects:

Project

Investment

NPV

A

135,000

6,000

B

200,000

30,000

C

125,000

20,000

D

150,000

2,000

E

175,000

10,000

F

75,000

10,000

G

80,000

9,000

H

200,000

20,000

I

50,000

4,000

7) Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?

A) Profitability Index

B) Incremental IRR

C) NPV

D) IRR

8) Assuming that your capital is constrained, which project should you invest in first?

A) Project C

B) Project G

C) Project B

D) Project F

9) Assuming that your capital is constrained, what is the fifth project that you should invest in?

A) Project H

B) Project I

C) Project B

D) Project A

10) Assuming that your capital is constrained, which project should you invest in last?

A) Project A

B) Project I

C) Project D

D) Project C

11) Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which project should you invest in and in what order?

A) CBFH

B) CBGF

C) BCFG

D) CBFG

12) Assume that your capital is constrained, so that you only have $600,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to:

A) $65,000

B) $80,000

C) $69,000

D) $111,000

13) Assume that your capital is constrained, so that you only have $500,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to:

A) $111,000

B) $69,000

C) $80,000

D) $58.000

Use the information for the question(s) below.

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing 0,000. The Sisyphean Company expects cash inflows from this project as detailed below:

Year One

Year Two

Year Three

Year Four

$200,000

$225,000

$275,000

$200,000

The appropriate discount rate for this project is 16%.

14) The profitability index for this project is closest to:

A) .44

B) .26

C) 0.39

D) .34

Use the information for the question(s) below.

Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below:

Business Name

Square Feet Required

Expected Monthly Cash Flow

Videos Now

4,000

70,000

Gords Gym

3,500

52,500

Pizza Warehouse

2,500

52,500

Super Clips

1,500

25,500

30 1/2 Flavors

1,500

28,500

S-Mart

12,000

180,000

WalVerde Drugs

6,000

147,000

Multigular Wireless

1,000

22,250

15) If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses should you lease and why?

16) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why?

17) Consider the following list of projects:

Project

Investment

NPV

A

405,000

18,000

B

600,000

90,000

C

375,000

60,000

D

450,000

6,000

E

525,000

30,000

F

225,000

30,000

G

240,000

27,000

H

600,000

60,000

I

150,000

12,000

J

270,000

30,000

You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what order will you se

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