A company with a cost of capital of 10 per cent has non-postponable investment opportunities with the estimated cash flows shown below. None of the projects can be undertaken more than once. Year Project A Project B Project C (£’000) (£’000) (£’000) 0 (2400) (2250) (1500) 1 600 900 450 2 900 900 450 3 1200 900 450 4 1200 900 450 5 900 900 450 6 600 450 7 (300) 450 a) Decide which projects should be accepted in the following circumstances: i) the company is not in a capital rationing situation; ii) the company is in a capital rationing position, the projects are divisible and only £4,500,000 is available for investment in year 0. the company is in a capital rationing position, the projects are not divisible and only £4,500,000 is available for investment in year 0. b) The payback period has serious shortcomings as a method of investment appraisal and yet is commonly used. Explain why this might be.
A company with a cost of capital of 10 per cent has non-postponable investment opportunities with the estimated cash flows shown below. None of the projects can be undertaken more than once.
|
Year |
Project A |
Project B |
Project C |
|
|
(£’000) |
(£’000) |
(£’000) |
|
0 |
(2400) |
(2250) |
(1500) |
|
1 |
600 |
900 |
450 |
|
2 |
900 |
900 |
450 |
|
3 |
1200 |
900 |
450 |
|
4 |
1200 |
900 |
450 |
|
5 |
900 |
900 |
450 |
|
6 |
600 |
|
450 |
|
7 |
(300) |
|
450 |
a) Decide which projects should be accepted in the following circumstances:
i) the company is not in a capital rationing situation;
ii) the company is in a capital rationing position, the projects are divisible and only £4,500,000 is available for investment in year 0.
the company is in a capital rationing position, the projects are not divisible and only £4,500,000 is available for investment in year 0.
b) The payback period has serious shortcomings as a method of investment appraisal and yet is commonly used. Explain why this might be.
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