P12-18Capital rationing – IRR and NPV approaches Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will earn less than its 15% cost of capital thereby resulting in a present value of inflows that is less than the initial investment. The firm has summarized in the following table the key data to be used in selecting the best group of projects.Projects Initial Investment IRR Present value of inflows at 15%A $5 000 000 17% $5 400 000B 800 000 18 1 100 000C 2 000 000 19 2 300 000D 1 500 000 16 1 600 000E 800 000 22 900 000F 2 500 000 23 3 000 000G 1 200 000 20 1 300 000a. Use the internal rate of return (IRR) approach to select the best group of projects.b. Use the net present value (NPV) approach to select the best group of projects.c. Compare Contrast and discuss your findings in part a. and b.d. Which projects should the firm implement? Why?
