ABC Corporation is considering three independent projects: Project X, Project Y, and Project Z. Each project requires an initial investment and has a different expected net present value (NPV) as follows: Project X: Initial investment of $100,000 with an NPV of $40,000. Project Y: Initial investment of $150,000 with an NPV of $50,000. Project Z: Initial investment of $200,000 with an NPV of $60,000. The company has a total capital budget of $220,000 for the year. If ABC Corporation must prioritize its projects due to capital rationing, which project or combination of projects should be selected to maximize the total NPV while staying within the budget?

Exam

CFA Level 1

Section

Difficulty

Corporate Finance

Capital Rationing and Project Selection for ABC Corporation

Medium Capital Budgeting Capital Rationing

ABC Corporation is considering three independent projects: Project X, Project Y, and Project Z. Each project requires an initial investment and has a different expected net present value (NPV) as follows:

Project X: Initial investment of $100,000 with an NPV of $40,000.
Project Y: Initial investment of $150,000 with an NPV of $50,000.
Project Z: Initial investment of $200,000 with an NPV of $60,000.

The company has a total capital budget of $220,000 for the year. If ABC Corporation must prioritize its projects due to capital rationing, which project or combination of projects should be selected to maximize the total NPV while staying within the budget?

Project X and Project Y, totaling $250,000.

Project Y and Project Z, totaling $350,000.

Project X and Project Z, totaling $300,000.

Hint

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