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Dear John,
Could you please explain how b) is done for this question? I understand that there is an expenditure limit for each of the 3 years, but I don’t understand the answer given in the revision kit and what they’re doing for this part.
Thank you
This is a normal linear programming question and you should have studied linear programming for Paper PM (was F5) or whatever exempted you from that exam. I also explain the approach in my free Paper AFM lectures.
According to the question we are able to do any fraction of each project and so although you are not required to solve the equations, we want to know what fractions of each project will end up giving the maximum total NPV without using more cash each year than the total available.
If we do a fraction Y1 of investment PDur01, then the NPV from that investment will be 464,000Y1, and the cash needed each year will be 4,000,000Y1 immediately, 1,100,000Y1 in 1 years time, and 2,400,000Y1 in 2 years time.
It is the same idea for each of the investments and we can then set up the equations for the total NPV and for the limits on the total cash available in each of the three years.
For a fuller explanation of the approach, do watch my free lectures.
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