Question from the Institute of Chartered Accountants in Ireland, Professional Examination 3, Management Accounting & Business Finance II, Summer 1995. (30 minutes)

1. Describe and distinguish between each of the following:

a. Soft capital rationing

b. Hard capital rationing 2. Asmall conglomerate, Shere Pic, has recently undertaken an investigation to identify suitable investment projects in an attempt to further diversity its operations. As a result of the investigation, five projects have been selected for further consideration and initial evaluation has yielded the following results: mki9

REQUIRED 1. Identify the projects which should be selected in order to maximise Net Present Value (NPV).

State the NPV figure which results from the optimal selection of projects. (4 marks)
Indicate how your recommendation and figure would be affected, if Projects C and D were mutually exclusive. (G marks)
Total marks = 18

Transcribed Image Text:

PROJECT NET PRESENT VALUE (NPV) () INITIAL OUTLAY () A B C D E 150,000 40,000 40,000 100,000 90,000 500,000 100,000 400,000 200,000 150,000 The company does not wish to access external financial markets and has identified 750,000 available from within its internal cash resources. All the projects are completely divisible.