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multiple period capital rationing

SSaline13y ago
in example 4 of chapter 11 of opentuition notes page number 54

can you please explain me what is the interpretation of

976 x a + 2529 x b + 862 x c . i heard you in lecture saying we will invest in proportion to maximise npv but how.. can you please elaborate a little..

Thanks so much,
Kind regards
John MoffatJohn MoffatTutor13y ago#1
The interpretation is that a, b, and c are the proportions of each of the three projects that we invest in, and so that expression gives the total NPV that will be generated from the three projects. The objective is to get the maximum total NPV.

It is a linear programming problem (you should be familiar with linear programming from F2 and F5), but you cannot be expected to solve it because there are 3 projects. (It is solvable, but the method needed is not in the syllabus).
The most that can be expected from you is to set up the problem, but you cannot be expected to get a solution.
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