Advanced : Single and multi-period capital rationing Raiders Ltd is a private limited company which is financed entirely by ordinary shares. Its effective cost of capital, net of tax, is 1 0%

per annum. The directors of Raiders Ltd are considering the company's capital1nvestment programme for the next two years, and have reduced their initial list of projects to four. Details of the proJects are as follows

None of the projects can be delayed. All projects are divisible:
outlays may be reduced by any proportion and net inflows will then be reduced in the same proportion. No project can be undertaken more than once Ra1ders Ltd is able to invest surplus funds in a bank deposit account y1elding a return of 7% per annum. net of tax.
You are required to:

(a) prepare calculations showing which projects Raiders Ltd should undertake if capital for immediate investment is limited to £500 000, but is expected to be available without limit at a cost of 10% per annum thereafter: (5 marks)

(b) prov1de a mathematical programming fonnulation to assist the directors of Raiders Ltd In choosing investment projects if capital available immediately is limited to £500000, capital available after one year is limited to £300000, and capital is available thereafter without limit at a cost of 10% per annum; (8 marks)

(c) ouUine the limitations of the formulation you have provided in (b); (6 marks)

(d) comment briefly on the view that in practice capital is rarely limited absolutely, provided that the borrower is willing to pay a sufficiently high price, and in consequence a technique for selecting investment projects which assumes that capital is limited absolutely. is of no use.

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Cash flows (net of tax) After After After present Net Internal rate of return one two three value Immediately year years years (at 10%) (to nearest 1%) (000) (000) (000) (000) (000) Project A -400 +50 +300 +350 +157.0 26% B -300 -200 +400 +400 +150.0 25% C -300 D 0 +150 +150 -300 +250 +300 +150 + 73.5 23% +159.5 50%