Capital Budgeting: A Toolkit Problem Involving Three Assets

Suppose you decide to add more tools to your existing toolkit. You have a capital budget of \$209.93 and a MARR = 19.537%. Which option or combination of options would provide you with the maximum amount of return for your investment. Information about each asset is provided below.

Asset A: High-Powered Drill
Year 1: -\$70.00
Year 2: \$100.00
Present Worth = \$11.43

Asset B: High Quality Hammer
Year 1: -\$25.00
Year 2: \$50.00
Present Worth = \$14.08

Asset C: High Speed Reciprocating Saw
Year 1: -\$150.00
Year 2: \$350.00
Present Worth = \$77.65

Solution:

One can see that the purchase of any single asset (e.g. Asset B only) is within the capital budget of \$209.93. Therefore, all of the individual assets are feasible.

All of the possible combinations of these assets, their total costs, present worths, and their feasibility are shown below.

Assets A and B have a total cost of \$95.00 in year 1 and a present worth of \$25.51. This combination of assets is feasible because their total cost is within the capital budget.

Assets A and C have a total cost of \$220.00 in year 1 and a present worth of \$89.08. This combination of assets is not feasible because their total cost is exceeds the capital budget.

Assets B and C have a total cost of \$175.00 in year 1 and a present worth of \$91.73. This combination of assets is feasible because their total cost is within the capital budget.

Assets A, B, and C have a total cost of \$245 in year 1 and a present worth of \$103.16. This combination of asset is not feasible because their total cost exceeds the capital budget.

In this situation, the feasible combination of assets with the highest present worth is assets B and C.