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Single period capital rationing in year 3

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Single period capital rationing in year 3

  • This topic has 1 reply, 2 voices, and was last updated 12 years ago by John Moffat.
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  • November 14, 2012 at 2:09 pm #55224
    nomantufail
    Member
    • Topics: 17
    • Replies: 13
    • ☆

    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.

    November 14, 2012 at 9:34 pm #107122
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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.

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