2) A small company is considering three possible projects (A, B, and C) over the next five year
time horizon. They have used extensive questionnaires and evaluations of each possible project
and have arrived at a relative ranking of each project (a higher score is a more favorable project).
Furthermore, they have estimated the cash flows needed for each project; positive numbers
indicate cash flow payments and negative numbers indicate cash receipts (e.g., earnings). This
information is summarized in the table below. The company has limited capital and does not want to increase its debt; thus, the CEO has
imposed budget constraints on the net funds that the company can afford to spend each year.
These budget limitations are indicated in the row “Budget”. Note that in some years (e.g., Year
3), earnings from Project B might offset the expenses of the other projects.
The CEO knows that she cannot fund all three projects at 100 percent; however, she can fund
projects at some proportion less than 100 percent. She assumes that the project value earned is
proportional to the percent funded (i.e., if project A is funded at 40%, it would be worth .40 x 22
= 8.8 to the company). She assumes that cash flows are similarly proportion to the percent of the
project that is funded.
a) Assuming that the value of the project portfolio is additive (over the three projects), what
percent of each project should the CEO fund? What is the resulting value of the project
portfolio?
b) The CEO decides that both projects A and C cannot be funded; that is, at most one of these
projects can be funded. How does this change your recommendation?
c) A consultant has told the CEO that feels the score associated with project A is not accurate and
that projects A and B are comparable (that is, have the same score). Does this make a difference
in your solution?
d) Using the project scores in part (a), consider the possibility of delaying the start of project C
one year. Would you consider such a delay option? Why or why not?
