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 $450,000. 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

SMart

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