Capital Budgeting: Three Asset Problem

Suppose you have three assets:

Asset A costs $5 and has a present worth of $8.
Asset B costs $2 and has a present worth of $4.
Asset C costs $3 and has a present worth of $10.

If your capital budget is $9, what asset or combination of assets would give you the maximum amount of return for your investment.

Solution:

(1) Find all feasible combinations under the given budget. Also include the total present worth of each combination.

The purchase of any single asset (e.g. Asset A only), would be feasible because they are within the capital budget of $9.

A combination of assets A and B would result in a total cost of $7 and a present worth of $12. The total cost of this combination is within the capital budget. Therefore, this is a feasible combination.

A combination of assets A and C would result in a total cost of $8 and a present worth of $18. The total cost of this combination is within the capital budget. Therefore, this is a feasible combination.

A combination of assets B and C would result in a total cost of $5 and a present worth of $14. The total cost of this combination is within the capital budget. Therefore, this is a feasible combination.

A combination of assets A, B, and C would result in a total cost of $10 and a present worth of $22. The total cost of this combination exceeds the capital budget. Therefore, this is not a feasible combination.

(2) Choose the feasible combinations with the highest present worth.

The combination of assets with the highest present worth is Assets A and C.

Answer: Assets A and C would give you the maximum return on your investments.

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