(a) Define capital rationing (4 marks)

b) Moyo Kulimba Ltd is considering five projects, V, W, X, Y and Z. Relevant details are as follows:

Project Investment required Present value of net NPV

Cash inflows

UGX.UGX UGX

V (25,000) 28,750 3,750

W (10,000) 10,640 640

X (20,000) 22,801 2,801

Y (30,000) 32,230 2,230

Z (40,000) 43,807 3,807

The company has only UGX 75, 000 of capital available to invest. All projects are divisible.

Required:

Which project should the company undertake in order to maximize the total NPV from its investments? (21 marks)

Total: 25 marks