Page 455 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Business valuations and market efficiency

Question 6

Capital rationing – divisible projects

A company has $1,000,000 available for investment and has identified the
following investment opportunities, all of which can only be done in whole or not
at all. All investments must be started now.

Determine which projects should be undertaken to maximise the overall NPV
earned.

Project Initial investment NPV

1 $250,000 $50,000

2 $300,000 $30,000

3 $650,000 $195,000

4 $40,000 $20,000

5 $150,000 $42,000

Look at the various combinations of projects that could be done:

1, 2, 4 and 5 uses $740k and earns $142k

1, 3 and 4 uses $940k and earns $265k

2, 3 and 4 uses $990k and earns $245k

3, 4 and 5 uses $840k and earns $257k

So the optimum combination is to do projects 1, 3 and 4.

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