1. **Problem Statement:** Explain the difference between mutually exclusive and independent projects. Rank projects R, S, T, X, Y, Z by IRR, NPV, and PI. Identify the capital budgeting method that maximizes NPV for a budget of 1300 million. Describe factors affecting WACC within and outside firm control. 2. **Definitions:** - Mutually exclusive projects: Only one project can be chosen among alternatives; selecting one excludes others. - Independent projects: Projects whose cash flows are unrelated; accepting one does not affect others. 3. **Ranking Projects:** Given data: | Project | Investment | IRR | NPV | PI | |---------|------------|-----|-----|----| | R | 700 | 24% | 300 | 2.15| | S | 600 | 33% | 840 | 3.60| | T | 500 | 31% | 20 | 1.56| | X | 300 | 25% | 200 | 2.51| | Y | 200 | 42% | 220 | 3.15| | Z | 200 | 30% | 260 | 3.45| **Rank by IRR (descending):** Y(42%), S(33%), T(31%), Z(30%), X(25%), R(24%) **Rank by NPV (descending):** S(840), R(300), Z(260), Y(220), X(200), T(20) **Rank by PI (descending):** S(3.60), Z(3.45), Y(3.15), X(2.51), R(2.15), T(1.56) 4. **Maximizing NPV with Budget 1300 million:** We want to select projects with total investment ≤ 1300 million to maximize total NPV. Try combinations prioritizing NPV: - S (600) + R (700) = 1300 investment, NPV = 840 + 300 = 1140 - S (600) + Z (200) + Y (200) + X (300) = 1300 investment, NPV = 840 + 260 + 220 + 200 = 1520 - S (600) + Z (200) + Y (200) + T (500) = 1500 > budget - R (700) + Z (200) + Y (200) + X (300) = 1400 > budget Best feasible combination is S + Z + Y + X with total investment 1300 and total NPV 1520. Hence, selecting projects S, Z, Y, and X maximizes NPV. 5. **Factors Affecting WACC:** - Within firm's control: - Capital structure (debt vs equity mix) - Dividend policy - Investment decisions - Outside firm's control: - Market interest rates - Economic conditions - Tax rates - Investor risk perception Final answers: - Difference: Mutually exclusive projects cannot be selected together; independent projects can. - Ranking: - IRR: Y > S > T > Z > X > R - NPV: S > R > Z > Y > X > T - PI: S > Z > Y > X > R > T - Maximize NPV by selecting projects S, Z, Y, X within 1300 million budget. - WACC factors include capital structure (internal) and market conditions (external).