Cartma plc's superb strategic planning group have identified five projects they judge to be shareholder wealth enhancing, and therefore feel that the firm should make these investment commitments.
The strategic planning group are keen on getting approval for the release of £42m to invest in all these projects. However, Cartma is a subsidiary of PQT and the holding company board have placed limits on the amount of funds available in any one year for major capital projects for each of its subsidiaries. They were prompted to do this by the poor response of debt holders to a recent capital raising exercise due to the already high borrowing levels. Also they feel a need to counteract the excessive enthusiasm in subsidiary strategic planning groups which could lead to over-rapid expansion if all positive NPV projects are accepted, placing a strain on management talent. The limit that has been imposed on Cartma for the forthcoming year is £38m.
The figures are:

Assume
- No inflation or tax.
- The rate of return required on projects of this risk class is 10 per cent.
- All project cash flows are confined within the five-year period.
- All projects are divisible (a fraction of the project can be undertaken), and none can be undertaken more than once.
What is the maximum NPV available if projects are selected on the basis of NPV alone?
Now calculate profitability indices (or benefit-cost ratios) for each project and calculate the maximum potential NPV if the £38m limit is adhered to.

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NPV Point in time (yearly intervals Em Em Em Em Project A Cash flow Discounted cash flows Project B Cash flow Discounted cash flow -10 10 +20 0 20/LI 0 -I5 5xAnnuity factor for 5 years @ 10% -15 +5 x3.7908 +3.95 Project C Cash flow Discounted cash flows 12 -8 1/1. 12/(1 0 +2.83 Project D Cash flow Discounted cash flow .-5 -5 2xAnnuity factor for 5 years @ 10% +2 x 3.7908 +2.58 Project E Cash flow Discounted cash flow -4 (3 x Annuity factor for 3 years @ 10%)/( 1.1 )2 3 x 2.4869 +2.17