Question $1(35$ Marks$)$

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

Initial Investment

$($Rands$)$

Length in

Years Annual Cash Flow $($Rands$)$

A $3,000,0006720,000$

B $3,500,0005980,000$

C $4,000,0007905,000$

D $5,000,00041,720,000$

E $6,000,00061,510,000$

F $7,000,00051,950,000$

G $8,000,00071,730,000$

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 R$16$ million to spend on capital projects next year. All projects

can only be undertaken once and are divisible.

Required:

$1\mathrm{.}1.$ Use capital rationing to determine which projects should be included in the company$$s

capital program. $(26)$

$1\mathrm{.}2.$ Is there another combination that produces a higher aggregate net present value than

the one developed in part $1\mathrm{.}1?(3)$

$1\mathrm{.}3.$ What is the maximum NPV in the absence of capital constraints? $(3)$

$1\mathrm{.}4.$ What is the cost of the capital rationing constraint? $(3)$