A small manufacturing company, which has limited resources to capital, has a capital rationing constraint and...

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A small manufacturing company, which has limited resources to capital, has a capital rationing constraint and is faced with the following investment projects for next year's capital program: Project A B C D E F G 1.1. Initial Investment (Rands) 1.2. 3,000,000 3,500,000 1.3. 1.4. 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 Length in Years 6 5 7 4 6 5 7 Annual Cash Flow (Rands) 720,000 980,000 905,000 Projects A and B are mutually exclusive and so are Projects D and E. The company has a 12% cost of capital and a maximum of R16 million to spend on capital projects next year. All projects can only be undertaken once and are divisible. 1,720,000 1,510,000 Required: Use capital rationing to determine which projects should be included in the company's capital program. (26) Is there another combination that produces a higher aggregate net present value than the one developed in part 1.1? (3) What is the maximum NPV in the absence of capital constraints? (3) What is the cost of the capital rationing constraint? (3) 1,950,000 1,730,000 A small manufacturing company, which has limited resources to capital, has a capital rationing constraint and is faced with the following investment projects for next year's capital program: Project A B C D E F G 1.1. Initial Investment (Rands) 1.2. 3,000,000 3,500,000 1.3. 1.4. 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 Length in Years 6 5 7 4 6 5 7 Annual Cash Flow (Rands) 720,000 980,000 905,000 Projects A and B are mutually exclusive and so are Projects D and E. The company has a 12% cost of capital and a maximum of R16 million to spend on capital projects next year. All projects can only be undertaken once and are divisible. 1,720,000 1,510,000 Required: Use capital rationing to determine which projects should be included in the company's capital program. (26) Is there another combination that produces a higher aggregate net present value than the one developed in part 1.1? (3) What is the maximum NPV in the absence of capital constraints? (3) What is the cost of the capital rationing constraint? (3) 1,950,000 1,730,000

Answer rating: 100% (QA)

SOLUTIONS To determine which projects should be included in the companys capital program we can calculate the Net Present Value NPV for each project using the companys cost of capital of 12 The NPV fo... View the full answer