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Chapter 9: Discounted cash flow – further aspects
Single-period capital rationing
A company has the following four projects available (cash flows in $; NPVs at 10%):
| Time | A | B | C | D |
|---|---|---|---|---|
| 0 | (500) | (600) | (300) | (400) |
| 1 | 221 | 207 | 194 | 181 |
| 2 | 221 | 207 | 194 | 181 |
| 3 | 221 | 207 | - | 181 |
| 4 | - | 207 | - | - |
| NPV at 10% | 50 | 57 | 36 | 50 |
What should the company's investment decision be if: (a) there is no capital rationing; (b) capital is restricted to $1,600 at time 0 and the projects are infinitely divisible; (c) capital is restricted to $1,600 at time 0 and the projects are not divisible?
(a) No rationing, and the ranking
Calculate the company's total net present value without capital rationing and project profitability indices, and identify the preferred ranking for the year.
(b) Divisible projects
Prepare the company's divisible project investment plan and calculate its net present value for the year.
(c) Whole projects only
Identify the company's optimal indivisible project combination and calculate its investment and net present value for the year.
Opening this exercise…