Holm plc uses a hurdle rate of 5% to appraise the viability of projects. The company has the following five investment opportunities, none of which is divisible, i.e. each project must be undertaken in whole or not at all:

Project	Initial Investment m	Cash Inflow 000
A	3.00	840
B	4.50	1,900
C	3.50	1,180
D	5.30	2,100
E	8.00	3,275

Each project has a conventional cash flow profile with a single initial investment outlay. The annual cash inflows for each project are expected to be received annually for a period of four years. The company has investment funds that are limited to a total of 8.5m. Any surplus funds can be used to reduce the companys bank overdraft, the balance of which is currently 0.5m and on which interest is payable at 6% p.a.

Required:

Explain what is meant by a conventional cash flow profile and explain its significance in relation to the concept of the internal rate of return;

(15%)

Identify the portfolio of projects that the Board of Holm plc should select;

(30%)

(c) Identify the portfolio of projects that the Board of Holm plc should select if projects were divisible, i.e. if it was possible to undertake a fraction of a project;

(25%)

(d) Suppose that the overdraft was 4m and the interest payable was 7.5% p.a.: explain why your advice to the directors of Holm plc would, or would not, change.

(30%)

[Total 100%]

Improve the answer by calcultion