Vernon Corp. has a capital budget of $1,000,000. Its independent projects cannot be divided: Project A: cost $600,000, NPV $150,000 Project B: cost $400,000, NPV $120,000 Project C: cost $500,000, NPV $140,000 Project D: cost $300,000, NPV $60,000 Which combination maximizes total NPV within the budget?

Correct answer: A) A and B, with total NPV of $270,000

Explanation

NPV per dollar invested (NPV / cost) is B 0.30, C 0.28, A 0.25 and D 0.20 (equivalent to profitability indexes of 1.30, 1.28, 1.25 and 1.20). Ranking on this basis selects B and C ($900,000, NPV $260,000), but the remaining $100,000 cannot fund another indivisible project. Checking feasible combinations: A + B uses exactly $1,000,000 for NPV $270,000, the highest. B + C + D would cost $1,200,000, which exceeds the budget. With indivisible projects, combinations must be compared directly.