Can anyone explain this cap.budjeting sum

Ok so 4 projects totalling 43 laks..u have 30 Laks which costed u 12%..

So u need to choose projects which maximise ur NPV..

After evaluation

Option 1: A , B, and C which requires  a budget of exactly 30 Laks but will yield an NPV of 10.4 Laks

and

Option 2: A, C and D which requires  a budget of Rs. 28 Laks and realise a NPV of 13.4 Laks.

And therefore we choose Option 2 but the awkward part is that Rs. 2 Laks is left univested (30 -28) and please remember money has time value so this extra 2 Laks will need to be invested since this costed u 12% p.a .. Logically u will be investing in avenues which will provide u more returns than 12%..But for the time being we don't know any other avenues to invest in. But what we know is that as long as we are investing it somewhere we will get a minimum of 10% return..This is called  a sure-shot return on investment or risk-free rate of return..

So for the time being you invest Rs. 2 Laks @ 10% for 5 years

so 2 Laks x 1.611 Laks = 3.2 Laks will be ur return in 5 years..

Translating this in present value terms    3.2 Laks x 0.567 = 1.81 Laks..

So to Conclude Venture Ltd. can invest in Project A,C and D and invest balance Rs. 2 Laks at 10% for 5 years..

Lets start with simpe example....u ve a sum of 30 lacs with u...

which a friend of urs is offering u to invest..

in the above mentioned projects...

just think like layman ,where will u invest ,

obviously where so ever ur returns are higher...u cant keep the money idle,if u money wont grow...

Now u ur questions...

lets  interact,

1)why do u feel A,C & D  should  be selected or not...

2)Risk Free rate...don ve be different..keep it simple...like a layman think...u ve 30l rs,i ask a loan with u for one year...is it ok if i return u back 30l at the end of one year,????

No! cos if u r giving me to use 30L free of cost for  one year ,u r loosing an oppurtunity to invest the same some in bank @ 10% ,which investment will not ve any risk...

So how shall we link this concept to the investment which ur friend has offered to u...

before u invest money in the friend's offer...u ve alternative to invest in bank,where return of 10% is guarenteed ,will u not accept atleast 10% in the investment in ur friend's offer..so here is it,there u discount risk free rate i e 10%.

last question of urs says tat u havent got the concept capital budget ..

I understood.

thanks to both of you ...

your last question ,indicates tat ur concept of capital budget isnt clear....

its difficult to text...yet ill try posting wen am free

yup...thank you very much :)