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Hi, I am not sure you have access to this paper, if you do, please see my below queries:
Question 3: This question covers capital rationing in extreme detail.
The below are two requirements from the question.
a) ii) Formulate an appropriate capital rationing model, based on the above investment limits, that maximises the net present value
(ii) Explaining the features of a capital investment monitoring system and discussing the benefits of maintaining such a system.
(d) Explain the different methods of dealing with a capital rationing problem, in the circumstances where:
(i) Capital is rationed in a single period, and
(ii) Capital is rationed in several periods.
Can you point me in the direction on study materials around this topic. I have kaplan study text and capital rationing is not covered in much detail, nor do the materials/lectures on OT.
What is a capital investment monitoring system?
Thanks
Just an FYI, an element of the question is based on NPV with a requirement to calculate the value of a project that starts in 4 years and proceeds for 15 years and calculating the percentage change in a particular variable that would result in a negative NPV (sale price per unit in this question)
An extremely difficult question all round.
Chapter 10 in OT notes and lecture – is this sufficient to be able to complete the sensitivity of a particular variable?
I could answer approx. 5 out of the 25 marks available on that question. And that’s not to say I would have scored 5/25 in the real exam.
Thanks
Hi – I’m unsure if I can answer here since it’s not the student forum, but you can look up the question Arbore Co from Dec 12.
It’s very similar and should be helpful.
I do not have access to the practice exam, but I do have the question Arbore.
Single period capital rationing is revision from Paper FM and is covered in full in our Paper FM lectures. As far as multi-period capital rationing is concerned, then given that you cannot be asked to solve a multi-period problem in the exam – only formulate the problem – then this is all covered in the Paper AFM lectures.
As far as a capital investment monitoring system is concerned, this is nothing at all technical. It is simply that any capital investment decision (whether involving capital rationing or not) is based on estimates of future cash flows. Obviously these estimates can turn out to be wrong and so it is essential that projects are monitored once they are underway so that as cash flows change from the original estimates then changes can be made to the investment programme as necessary. This is particularly relevant when there is capital rationing in that it may be possible to change the amount invested in each of the available projects.
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