Evergreen Activities Ltd are considering three investment project proposals. The expected pattern of cash flows is as follows

Respective variable costs are 50 per cent of annual revenues. The fixed costs are directly associated with the projects and will be incurred by going ahead with the proposals. Each project can be undertaken only once and each is divisible, that is, it is possible to undertake part of a project, if required. The company has the cost of financing of 8 per cent per annum and the investment budget for Year Zero is restricted to 40,000. All cash flows occur at the year-ends. Assume no tax and inflation.

Required: Determine the optimal allocation of the investment budget among these projects.

Project A B Initial Investment in Year Zero (000) 15 35 14 Annual Sales Revenues (000). 28 35 20 Annual Fixed Costs (000) 7 4 6 Life of Project (years) 5 4 7