ZCCM $$ IH is reviewing investment proposals submitted by its departmental heads. Its

investment funds are limited to K$8$ million in $2024.$ Details of three possible

investments, none of which can be delayed, are given below:

Project $1$

An investment of K$3$ million in work stations. Each work station would be for an

individual employee $,$ and would lead to savings in labour costs from increased

efficiency and from reduced absenteeism$.$ Savings in labour costs in money terms are

expected to be as follows:

Year $12345$

Cash Flows $($K$000)8509009501,000950$

Project $2$

An investment of K$4\mathrm{.}5$ million in cloud computing hardware that is expected to reduce

administration costs by K$1,400,800$ per annum in money terms for the next five years.

Project $3$

An investment of K$4,000,000$ in new biometric access control machines. Net cash

savings of K$1,200,000$ per annum are expected in current price terms and these are

expected to increase by $3\mathrm{.}6\%$ per annum due to inflation in the five year life of the

machines.

ZCCM $$ IH$,$ has a money cost of capital of $12\%$ and taxation should be ignored.

Required:

$($a$)$ Determine the best way for ZCCM $$ IH to invest the available funds and calculate the

resultant NPV:

$($i$)$ On the assumption that each of the three projects is divisible;

$($ii$)$ On the assumption that none of the projects are divisible.

$($b$)$ Explain how the NPV investment appraisal method is applied in situations where

capital is rationed.

$($c$)$ Discuss the reasons capital rationing may arise.