Financial decision-making

FM – L2 – Q66 – Capital rationing

Recommend investments to maximize NPV assuming divisible projects with a GH¢150,000 capital limit.

Question

A company, Kumasi Ventures Ltd, has identified five investment projects that it would like to undertake. None of the investments can be delayed. If they are not undertaken now, the opportunity to invest will be lost. Details of the five investments are as follows:

Investment	Capital investment required in Year 0	NPV of the investment
	GH¢	GH¢
A	60,000	12,000
B	80,000	21,600
C	50,000	8,500
D	45,000	10,800
E	55,000	9,900

Capital is in short supply, and only GH¢150,000 is available for investment. The company cannot therefore undertake all five investments.
Required:
In order to maximise the total NPV of its investments, recommend which investments to undertake:
(a) assuming that all five investment projects are divisible.

(b) assuming that none of the five investments is divisible, and the choice is either 0% or 100% of each investment.

Answer

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Tags: Capital rationing, Financial decision-making, Indivisible projects, investment appraisal, NPV
Level: Level 2

Topic: Capital rationing

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

Question

A business entity, Volta Ventures, is considering its policy for the replacement of machines. One type of machine in regular use is Machine Y. This machine has a maximum useful life of four years, but maintenance costs and other running costs rise with use. An estimate of costs and disposal values is as follows:

Machine Y: Purchase cost GH₵40,000

Year	Maintenance costs and other running costs in the year	Disposal value at the end of the year
	GH₵	GH₵
1	8,000	25,000
2	12,000	20,000
3	20,000	10,000
4	25,000	0

The cost of capital is 10%.

Required
Calculate the equivalent annual cost of a replacement policy for the machine of replacement:
(a) every one year
(b) every two years
(c) every three years
(d) every four years.
Recommend a replacement policy for the machine.

Answer

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Tags: Asset Replacement, Cash Flows, Cost of Capital, Depreciation, Discounted cash flow, Equivalent Annual Cost, Financial decision-making, investment appraisal, Machine Replacement, Net Present Value
Level: Level 2

Topic: DCF: Specific Applications

FM – L2 – Q51 – Introduction to investment appraisal

State two justifications for payback period and one for ARR as investment appraisal techniques.

Question

ZESTA VENTURES

It is said that of all the capital investment evaluation approaches, the Payback (PB) and Accounting rate of return (ARR) methods are widely used in practice. But these methods are not without limitations.

Required:

(a) State TWO justifications of payback period and ONE justification of ARR for their popularity in practice as investment appraisal techniques.

(b) Outline TWO limitations each for payback and ARR, as investment appraisal techniques.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting rate of return, Financial decision-making, investment appraisal, Limitations, Payback period
Level: Level 2

Topic: Introduction to Investment Appraisal

Tag (SQ): Financial decision-making

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FM – L2 – Q66 – Capital rationing

Recommend investments to maximize NPV assuming divisible projects with a GH¢150,000 capital limit.

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

FM – L2 – Q51 – Introduction to investment appraisal

State two justifications for payback period and one for ARR as investment appraisal techniques.

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FM – L2 – Q66 – Capital rationing

Recommend investments to maximize NPV assuming divisible projects with a GH¢150,000 capital limit.

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FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

You're reporting an error for "FM – L2 – Q65 – DCF: Specific applications"

FM – L2 – Q51 – Introduction to investment appraisal

State two justifications for payback period and one for ARR as investment appraisal techniques.

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