The Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has allocated...

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The Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has allocated $1 million for capital budgeting purposes. The following proposals and associated profitability indexes have been determined. The projects themselves are independent of one another.

PROJECT	AMOUNT	PROFITABILITY INDEX
1. Extend ski lift 3	$500,000	1.22
2. Build a new sports shop	150,000	0.95
3. Extend ski lift 4	350,000	1.20
4. Build a new restaurant	450,000	1.18
5. Build addition to housing complex	200,000	1.19
6. Build an indoor skating rink	400,000	1.05

a. If strict capital rationing for only the current period is assumed, which of the investments should be undertaken?

b. Is this an optimal strategy?

Robert · Accepted Answer

The Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has allocated $1 million for capital 
budgeting purposes. The following proposals and associated profitability indexes have been determined. The projects themselves 
are independent of one another. 
PROJECT AMOUNT PROFITABILITY  INDEX 
1. Extend ski lift 3 $500,000 1.22 
2. Build a new sports shop 150,000 0.95 
3. Extend ski lift 4 350,000 1.20 
4. Build a new restaurant 450,000 1.18 
5.

The Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has allocated $1 million for capital budgeting purposes. The following proposals and associated profitability...

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