Your consulting firm has been hired to assist WWTWDW (We Wish This Were a
Deterministic World) with their capital budgeting. You are to write a brief “technical report”
giving the recommended projects, and describing your principal assumptions. What is your
evaluation criterion, and why did you make this choice? As some estimates may change
before project selection is actually made, discuss which circumstances would force changes
in the recommended list and what those changes would be. The analysis used in developing
the recommendations should be an appendix to your technical report.
1. The four numbered projects (Table 50-1) may all be done, but the lettered
alternatives within each project are mutually exclusive.
2. The minimum attractive rate of return is 15%, but the firm averages a 20% return
on its investments.
3. The capital budget, excluding borrowing, is $100,000, and the company may
borrow on short notice $10,000 at 18% from an interested venture capitalist. (The
borrowing rate includes an increase that reflects the Board of Directors’ estimate
of the cost of increases in bookkeeping expenses and managerial time used.)
4. You may assume that pessimistic estimates have a probability of .25 and that
optimistic estimates have a probability of .1.214
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