Dysxa Co is looking to expand the capacity of an existing factory in its Alpha Division by 850,000 units per year in order to meet increased demand for one of its products. The expansion will cost $3.2 million.

The selling price of the product is $3.10 per unit and variable costs of production are $1.10 per unit, both in current price terms. Selling price inflation of 3% per year and variable cost inflation of 6% per year are expected. Nominal fixed costs of production have been forecast as follows:

Year	1	2	3	4
Fixed costs ($)	110,000	205,000	330,000	330,000

Dysxa Co has a nominal after-tax weighted average cost of capital of 10% and pays corporation tax of 20% per year one year in arrears. The company can claim 25% reducing balance tax-allowable depreciation on the full cost of the expansion, which you should assume is paid at the start of the first year of operation.

Dysxa Co evaluates all investment projects as though they have a project life of four years and assumes zero scrap value at the end of four years.

Question

1. Calculate the net present value of the investment project and comment on its financial acceptability.

2. Dysxa Co has limited the capital investment funds in its Delta Division to $7m. The division has identified five possible investment projects, as follows:

Project	Initial Investment ($)	Net present value ($)
A	3,000,000	6,000,000
B	2,000,000	3,200,000
C	1,000,000	1,700,000
D	1,000,000	2,100,000
E	2,000,000	3,600,000

These projects are divisible and cannot be deferred or repeated. Projects C and E are mutually exclusive. Determine the net present value of the optimum investment schedule for Delta Division.

3. Discuss the reasons why hard and soft capital rationing occur.

4. Discuss TWO ways in which the risk of an investment project can be assessed.