QUESTION 2: (25 Marks) Widget is a listed group which operates a number of manufacturing facilities within its home country, Namibia and its currency is the N$. Widget has N$700 million funds available for capital investment in new product lines in the current year. Most products have a very limited life cycle. Four possible projects have been identified, each of which can be started without delay. Initial calculations for these projects are shown below:

Project	Initial investment (N$ million)	Net annual cash inflows after the initial investment (N$ million)	Project term (years)	PV of cash flows arising after the initial investment (N$ million)	NPV (N$ million)
A	100	151.2	1	135	35
B	150	82.3	4	250	100
C	300	242.6	2	410	110
D	350	124.0	6	510	160

Notes: 1. The projects are non-divisible and each project can only be undertaken once. 2. Apart from the initial investment, annual cash flows are assumed to arise at the end of the year. 3. A discount rate of 12% has been used throughout. 4. Ignore taxation.

REQUIRED	Marks
2.1.	Prioritise the projects according to each of the following measures: (a) Net present value (NPV) (b) Profitability index (PI) (c) Payback (undiscounted)	14
2.2.	Explain the strengths and weaknesses of each of the prioritisation methods used in (2.1.) above as the basis for making investment decisions in the context of capital rationing for non-divisible projects.	9
2.3.	Evaluate the sensitivity of the projects on initial investments.	2
TOTAL MARKS	25