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Sir can u please explain me part b of this question maximum rate of additional finance,how to do it i cannt understand where the figures r coming from i could understand part a of this question. Thanks sir please help me.
The capital rationing is only for one year – next year there is no problem.
In part (a) we rejected some projects because there was not enough capital available.
However, if we can get more cash (just for one year) then provided the interest rate on the cash is not too high, then we will borrow just for the one year and still invest in them.Hello sir,
Can you please explain why the profitability index is used in part (b) to find the max.rate for
additional finance?Thanks in advance.
Short term finance would only be needed for one year.
So they could borrow the 1,820 needed provided it cost less than the 141 that is returned at 10%.
So they can afford to pay up to an extra 141/1820 = 7.74%.
So a total of 17.74%(There is no need to use the term profitability index at all)
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