Investment desicions

Hello sir,

I am confused about this question. Why is NPV divided by capital in restricted period? I would be very grateful if you could help.

Four projects, P, Q, R and S, are available to a company that is facing shortages of capital
over the next year but expects capital to be freely available thereafter.
P Q R S
$000 $000 $000 $000
Total capital required over life of project 20 30 40 50
Capital required in next year 20 10 30 40
Net present value of project at company’s cost of capital 60 40 80 80

In what sequence should the projects be selected if the company wishes to maximise net
present values?

Answer:

P Q R S
NPV/$ of capital in restricted period 60/20 40/10 80/30 80/40
= 3 = 4 = 2.67 = 2
The optimal sequence is QPRS.