Jumbo city must decide where to allocate $3 million, which is available for immediate investment. It has four EV projects from which to choose (all cash flows in millions) and has decided to use the net present value and profitability index approaches when deciding how to allocate these funds. Disregard the difference in project lives. The cost of capital is 10%.
Year Model 1 Model 2 Model 3 Model 4
0 –$1 –$2 –$3 –$1.5
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1 $1 $1 $4 $0.9
2 $1 $1 – $0.9
3 – $1 – $0.9
- What is the net present value for each project and which projects are acceptable?
- What is the profitability index for each project and which projects are acceptable?
- Given the capital constraint, which project or projects do you select and why?
- How much value does Tesla add to itself by undertaking this project or projects? How does this differ if there was no capital constraint?