Problem:
Johnston Investments is considering a couple of investment possibilities. Each investment considered will draw on the capital account during each of its first 3 years. In the long run, each investment is predicted to have a positive NPV. Posted in the spreadsheet are the investment choices, its NPV's, and capital requirements. Amounts are in thousands of dollars. In addition, the amount of capital available to the investments in each of the next three years is predicted to be $12 million each year. The goal of Johnston Investments is to maximize the total NPV, which is the sum of NPV's of the investments chosen.
a) Assume that any combination of the investments is permitted, which ones should Perry choose to maximize NPV?
b) What is the value of the total NPV given by your answer in part a?
c) Suppose that the expansion investments (one-phase expansion and two-phase expansion) are mutually exclusive (i.e. only one of them can be made). How does this alter the solution in part a?
d) What is the value of the total NPV in part c?
e) Ignore parts c and e in this question Suppose that the test market cannot be carried out unless the advertising campaign is also adopted. Which investments should Johnston choose to maximize NPV given this extra condition?
f) What is the value of the total NPV in part e?
*All numbers are in thousands of dollars.*
|
Project |
|
|
|
One-Phase
Expansion |
Two-Phase
Expansion |
Test
Market |
Advertising
Campaign |
Basic
Research |
Purchase
Equipment |
|
Capital
Available |
| NPV |
4200 |
6800 |
9600 |
4400 |
8700 |
3500 |
|
|
| Year 1 Capital |
3000 |
2500 |
6000 |
2000 |
5000 |
1000 |
|
15000 |
| Year 2 Capital |
1000 |
3500 |
4000 |
1500 |
1000 |
500 |
|
15000 |
| Year 3 Capital |
4000 |
3500 |
5000 |
1800 |
4000 |
900 |
|
15000 |