Illustration 6 : C Ltd. is considering its capital investment programme for 2010 and 2011. The company is financed entirely by equity shares and has a cost of capital of 15% per annum. The company have reduced their initial list of projects to five, the expected cash flows of which are as follows: Project Cash Flows 2010 2011 2012 2013 A - 60,000 +25,000 +25,000 + 30,000 - 20,000 B - 30,000 +25,000 +45,000 - 40,000 - 50,000 +60,000 +70,000 D 0 - 80,000 +45,000 +55,000 E - 50,000 + 10,000 +,30,000 +40,000 None of the above projects can be delayed. All the 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. C Ltd. is able to invest surplus funds in a bank deposit account yielding an annual return of 10%. C Ltd. cost of capital is 15%. 45 Required (i) Prepare calculations showing which projects C. Ltd. should undertake, if capital is expected to be available as indefinitely large amounts at 15% per annum during all future periods. (ii) Show how your answer to (i) would vary if capital available for investment was limited to Rs. 1,00,000 in 2011 but was not limited thereafter. (iii) Provide a mathematical programming formulation which would assist C Ltd. in choosing investment projects if capital available in 2010 is limited to Rs. 1,00,000, capital is available in 2011 is limited to Rs. 90,000, capital available thereafter without limit at 10% per annum, and the shareholders required return from the company was 15% per annum at all relevant times. Ignore taxation. Present value factors at 15% year 1-0.8696; 2- 0.7561; 3-0.6575