This issue is taken from Elan’s PQ13 on Capital Budgeting. You have to choose between a set of projects and have $72m to spend. Project, Investment, NPV A: 15, 8 B: 12, 14 C: 25, 6 D: 22, 16 E: 30, 18 F: 18, 14 G: 20, 10 Which set would you choose: A) projects B, D, E, and F B) projects B,D, F, and G C) projects A, B, D, and F Elan’s answer is C, as it ranks projects by Profitability Index. My answer is B: Set A: too expensive, budget is 82 Set B: NPV = 54 and budget is 72 Set C: NPV = 52 and budget is 67 I believe Elan is wrong because PI doesn’t necessarily optimize the budget allocation. Can someone confirm my line of thoughts?
Where is this question? I don’t see it on the Elan PQ set for Corp Finance
Typo: it is PQ13
I agree, this isn’t wealth maximizing. Guess the important thing to realize is to take the NPV maximizing route within the budget constraints and why Élan thinks this is the correct answer (under the PI approach).
Dear U should rank the projects based of PI not NPV in capital Rationing, that’s why Elan choose answer C.
Yesterday I solved this question & I did your mistake by choosing answer B.
Good luck.
“Wealth maximization is best guided by the NPV criterion.”
Section 7.2 in Reading 25 consistently applies the NPV maximizing function within budget constraints, even when it diverges from the PI ranking, so long as projects are not divisible.
I think Elan is wrong here, but i understand what they are getting at.
EOC16 from the CFAI curriculum is similar. While CFAI also uses the PI criterion, the answer clearly states to choose the set that yields the highest NPV. Therefore Elan has it wrong, the correct answer is B since it is the set that yields the highest NPV.
Dear, EOC16 Answer C is better than answer B, since Answer C yield higher NPV & PI, So U can’t reason your way through it. Waitting for aditional contribution.
@eveningstar is referring to answer B in the Elan PQ, not CFAI. I agree that in the EOC 16 answer C is better than answer B, but it’s because the NPV is higher within the budget constraint. The PI is used as a guide, NPV maximization is the ultimate criteria.