Answer Happy

1. For each of the 11 proposed projects, calculate the project
IRR, the “spread” (difference between IRR and project cost of
capital, and the Profitability Index (PI) – P.I. being the
crucial capital budgeting decision tool in this scenario of a
constrained capital budget. Then rank the 11 project proposals
on the both PI and the “spread” between IRR and project hurdle
rates. How closely do ranking on PI versus “spread” match each
other?
2. Which set of projects should the board of Svenska
Livsmedel AB select for the capital budget for 2022, given
that the firm’s capital budget constraint of SEK 1.7 billion? Or to
put it another way: which bundle of projects has the highest
possible NPV? Ranking projects by PI is the way to accomplish that
task. How much NPV is the firm expected to receive from your
suggested collection of projects?
Svenska Livsmedel AB 1700 million SEK (Swedish Kronor) capital budget, all monetary figures below are stated millions of SEK Project 1 2 3 4 5 6 7 9 10 11 Upgrade Purchase new New yogurt Valve trucks plant (Malmö) Expand butter plant (Karlstad) ) Swedish meatball contract for IKEA Hurring Expand frozen Expand frozen dessert line to dessert line to Denmark etc. Norway ete. Stockholm bakery Information system upgrade Akvavit & Replace ligueur lighting in acquisition several plants misc. seafood sample project 100.00 450.00 Investment installed.cost) Plant, Property, & Equipment Net Working Capital change Total investment at 375.00 75.00 125.00 25.00 150,00 220,00 40.00 210,00 0.00 210.00 30.00 330,00 250.00 50.00 300.00 250.00 50.00 300.00 225.00 45.00 270.00 250.00 0.00 250.00 80.00 0.00 50.00 0.00 150.00 600.00 450.00 260.00 80.00 50 Year 0 -450.00 10.00 1 1 2 2 -250.00 55.00 55.00 3 -600.00 100.00 120.00 140.00 160.00 180.00 50.00 -330.00 45.00 45.00 55.00 60.00 68.00 75.00 75.00 75.00 4 50.00 EXPECTED PROJECT FREE CASH FLOWS (includes investment at t=0) -1.50.00 -260.00 -210.00 -300.00 -300.00 -270.00 18.75 65.00 50,00 52.50 45.00 45.00 22.50 65.00 50.00 60.00 52.50 60.00 26.25 65.00 50.00 67.50 60.00 70.00 30.00 65.00 50.00 75.00 67.50 70.00 33.75 65.00 50.00 83.11 75.00 75.00 37.50 65.00 50.00 90.00 85.00 75.00 22.50 65.00 50.00 97.50 90.00 75.00 22.50 65.00 105.00 100.00 75.00 22.50 65.00 112.50 105.00 75.00 22.50 65.00 120.00 112.50 75.00 5 75.00 82.50 90.00 94.00 98.00 102.00 75.00 78.75 82.50 -R0.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00 50.00 50.00 50.00 50.00 40.00 40.00 6 7 -50.00 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 8 200.00 200.00 180.00 180.00 180.00 9 10 Project Classification 3 2 1 5 1 1 1 3 1 4 1 Internal Rate of Return (IRR) Project cost of capital Spread (IRR minus hurdle rate) Rank on spread 21.41% 12.00% 9.41% Net Present Value (NPV) 20.6278 Project Class "1" means 12% cost of capital 1.4126 Profitability Index (PI) Rank on PI Project classificati Type of project 1 New products or new markets 2 Product or market extension 3 Etricity improvements Safety or environmental Cost of capital (hurdle rate) 12% 10% 8% 10.50% WACC 4