Optimal Project Selection under Capital Rationing

ABC Corporation is facing a situation where its available budget for new projects is limited, a concept known as capital rationing. The firm has identified three potential projects with the following net present values (NPVs) and investment costs:

• Project X: NPV of $100,000 with an investment cost of $700,000.
• Project Y: NPV of $150,000 with an investment cost of $800,000.
• Project Z: NPV of $120,000 with an investment cost of $600,000.

ABC Corporation has a total capital budget of $1,500,000. With this capital constraint, which combination of projects should the company undertake to maximize its total NPV?