Finance

Galaxy Satellite Co.

(120 Points)

Galaxy Satellite Co. is attempting to select the best group of independent

projects competing for the firm's fixed

capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A

summary of key data about the proposed projects follows.

Project

PV of Inflows

Initial Investment

IRR

A

$3,050,000

$3,000,000

21%

B

$9,320,000

$9,000,000

25%

C

$1,060,000

$1,000,000

24%

D

$7,350,000

$7,000,000

23%

1.

Use the NPV approach to select the best group of projects.

(Note that just the PV of inflows is

given, you must subtract the initial investment to find the NPV.)

2.

Use the IRR approach to select the best group of projects.

(Note that the discount rate or the cost

of capital is 20%.)

3.

Which projects should the firm im

plement based on your analysis of both techniques and given the

capital rationing amount? Write an email to your boss, Andy Fast, the CFO, explaining your

rationale proving the choices based on the considerations of shareholder value and the maximum

invest

ment budget. Keep in mind that you are less concerned with using the whole budget than

with maximizing the total return to Galaxy satellite.

Galaxy Satellite Co. (120 Points)

Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed

capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A

summary of key data about the proposed projects follows.

Project PV of Inflows Initial Investment

IRR

A $3,050,000 $3,000,000 21%

B $9,320,000 $9,000,000 25%

C $1,060,000 $1,000,000 24%

D $7,350,000 $7,000,000 23%

1. Use the NPV approach to select the best group of projects. (Note that just the PV of inflows is

given, you must subtract the initial investment to find the NPV.)

2. Use the IRR approach to select the best group of projects. (Note that the discount rate or the cost

of capital is 20%.)

3. Which projects should the firm implement based on your analysis of both techniques and given the

capital rationing amount? Write an email to your boss, Andy Fast, the CFO, explaining your

rationale proving the choices based on the considerations of shareholder value and the maximum

investment budget. Keep in mind that you are less concerned with using the whole budget than

with maximizing the total return to Galaxy satellite.