Answered: D G H K. 1 Capital budgeting model…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Question

Change the capital budgeting model in Figure 6.5 so that 80% of each cost in row 5 is incurred right now, at the beginning of year 1, and the other 20% is incurred a year from now, at the beginning of year 2. You can assume that the NPVs don’t change. The available budget in year 1 is $11.5 million, and the budget in year 2 is $3.5 million.
a. Assuming that available money uninvested in year 1 cannot be used in year 2, what combination of investments maximizes NPV?
b. Suppose that any uninvested money in year 1 is available for investment in year 2. Does your answer to part a change?

D
G
H
K.
1 Capital budgeting model
Range names used
Budget
Decisions -MadellSB$10:SH$10
Total cost =ModellSB$14
Total NPV -MadellSB$17
2
=ModellSD$14
3 Input data on potential investments ($ millions)
4 Investment
5 Cost
3.
$.0
$2.4
$3.5
$5.9
$6.9
$4.5
$3.0
6 NPV
7 ROI
$5.6
$2.7
$3.9
11.4%
$6.8
15.3%
$7.7
11.6%
$3.3
10.0%
$5.1
12.0%
12.5%
13.3%
9 Decisions: whether to invest
10 1 if yes, O if no
11
12 Budget constraint
1
13
Total cost
Budget
14
$14.9
$15
15
16 Objective to maximize
17 Total NPV
$16.7

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