- This topic has 1 reply, 2 voices, and was last updated 1 year ago by .
Viewing 1 reply thread
Viewing 1 reply thread
- You must be logged in to reply to this topic.
Forums › Ask CIMA Tutor Forums › Ask CIMA P2 Tutor Forums › CAPITAL RATIONING
Hi there,
I have the following question below:
A company with investment funds for the present year limited to $150,000 has identified a number of potential investment projects which are listed below along with their relative cost and expected NPV.
$ $
Project Investment NPV
L (15,000) (3,000)
M 75,000 15,240
N 24,000 12,600
O 82,000 22,456
P 35,000 5,000
What is the optimal NPV the company can earn assuming that all the projects are divisible?
The answer is $44,045 instead of $43,997 which is the answer I initially had.
I believe the negative 15k is an advanced investement but why is it adjusted in the optimal NPV calc? Why is it added onto the limited 150k investment funds and why are we including in the calculation?
Thank you
If L had not existed then the 150,000 would have been invested in all of N, all of O, and the remaining $44,000 would be invested in M.
However if they choose L in addition then they would have an extra $15,000 that they could invest in M.
L does give a negative NPV of $3,000, but being able to invest an extra $15,000 in M gives extra NPV from M of 15,000/75,000 x 15,240 = £3,048 and so it is worthwhile doing L so that they can invest more in M (and get a net $48 extra NPV).