If a company has following cash inflows Year 1 10,000 Year 2 10,000 Year 3 10,000 Year 4 25,000 And company requires investment outflows restricted to £60,000 in year 3 and has capital rationing problem in year 3. Assume return rate of 10% from all activities.
How should we approach this problem? Should we discount all cashflows to year 0 or should we consider all cashflows at year 3 and therefore compound year 1 and 2 cash inflows.
You do it exactly as normal – calculate the NPV (i.e. at time 0) and then calculate the NPV per $ required at time 3. It does not matter that the rationing is at time 3.