- 15 Marks
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.
Find Related Questions by Tags, levels, etc.
Report an error
