Optimal Project Selection Under Capital Rationing

ABC Corp. is considering several mutually exclusive investment projects, each with distinct cash flow patterns and capital requirements. Due to budget constraints, they have decided to implement a capital rationing strategy where only a limited number of projects can be funded. The company evaluates the projects using their internal rate of return (IRR) and net present value (NPV) metrics.

Currently, the available investment budget for the upcoming year is $1,000,000, and the projects under consideration are:

• Project X: Requires $600,000, with an NPV of $300,000.
• Project Y: Requires $400,000, with an NPV of $250,000.
• Project Z: Requires $500,000, with an NPV of $280,000.

Assuming the company has a priority on maximizing NPV and cannot exceed the budget, which combination of projects should ABC Corp. select?