There are two different assumptions: either projects are divisible and fractions can be done, or they are not when it is all or nothing. You have to see what the question specifies.

Some questions sir, 1) firstly why will a project only to be left at 50% will be carried out? won’t it be better just to carry out 2 projects rather than 2.5?

2) dropping sale price also reduces contribution but you only looked at the change in sales revenue and adjusted it for $13875? I think denominator should have had the “new revenue less old marginal costs” to give different contribution

In capital rationing, all available projects must be represented. Any that have a negative NPV will never be done. The remainder give positive NPVs so doing 50% of one will yield 50% of its NPV and that is better than nothing

Sensitivity varies one item at a time. If selling price falls only revenue is affected: costs and volumes stay the same. So the proportionate fall in SP that will give a zero NPV is original NPV/Original revenue.

Maybe I am misunderstanding, but when you worked out the NPV per dollar to decide which project to undertake (when they were all equally divisible), you reached an NPV of 22.05. The total cost is 24. Does this not imply that if you undertake Project 2, Project 1 and 50% of Project 3 you will end up in a loss situation – i.e. NPV of Projects 22.05 minus Cost 24 of projects equals loss of 1.95. Would it not be wiser to not undertake the projects when they are returning these types of NPV’s?

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abdulahad92 says

Sir, are both the divisible and indivisible assumptions of a project are capital constrained? This is what I saw in notes

Ken Garrett says

There are two different assumptions: either projects are divisible and fractions can be done, or they are not when it is all or nothing. You have to see what the question specifies.

abdulahad92 says

Some questions sir,

1) firstly why will a project only to be left at 50% will be carried out? won’t it be better just to carry out 2 projects rather than 2.5?

2) dropping sale price also reduces contribution but you only looked at the change in sales revenue and adjusted it for $13875? I think denominator should have had the “new revenue less old marginal costs” to give different contribution

regards

Ken Garrett says

In capital rationing, all available projects must be represented. Any that have a negative NPV will never be done. The remainder give positive NPVs so doing 50% of one will yield 50% of its NPV and that is better than nothing

Sensitivity varies one item at a time. If selling price falls only revenue is affected: costs and volumes stay the same. So the proportionate fall in SP that will give a zero NPV is original NPV/Original revenue.

Philip says

Maybe I am misunderstanding, but when you worked out the NPV per dollar to decide which project to undertake (when they were all equally divisible), you reached an NPV of 22.05. The total cost is 24. Does this not imply that if you undertake Project 2, Project 1 and 50% of Project 3 you will end up in a loss situation – i.e. NPV of Projects 22.05 minus Cost 24 of projects equals loss of 1.95.

Would it not be wiser to not undertake the projects when they are returning these types of NPV’s?

Ken Garrett says

The ‘N’ in NPV means ‘net’ so that the NPV is the PV of the inflows less the outflows (cost). Positive NPVs are always good.

Philip says

Cheers – schoolboy error on my part!

Zainab says

Hi,

Can anyone help.

P172 of lecture notes – how the IRR is calculated? I cannot seem to follow the notes.

Can anyone explain how you get to 15% ?

Thanks for your time and help.

shuhan525 says

A+ (B-A) x a/(a+b) = IRR

A = percentage that gives a positive npv

B= percentage that give negative npv

a = positive npv

b= negative npv