The Board of ABC Co has made a decision that the company will limit its investment funds to $10 million for the next year. Now they are preparing their capital budget and considering five projects, as follows:

Project	Initial Investment	Net Present Value
A	$2,500,000	$1,000,000
B	$2,200,000	$1,550,000
C	$2,600,000	$1,350,000
D	$1,900,000	$1,500,000
E	$5,000,000	To be calculated

All five projects have a project life of four years. Projects A, B, C and D are divisible, and Projects B and D are mutually exclusive.

Project E is a strategically important project which the Board of ABC Co have decided must be undertaken in order for the company to remain competitive, regardless of its financial acceptability.

Information relating to the future cash flows of this project is as follows:

Year	1	2	3	4
Sales volume (units)	12,000	13,000	10,000	10,000
Selling price ($/unit)	450	475	500	570
Variable cost ($/unit)	260	280	295	320
Fixed costs ($000)	750	750	750	750

These forecasts are before taking account of

12. Selling price inflation of 5.0% per year,
13. Variable cost inflation of 6.0% per year and
14. Fixed cost inflation of 3.5% per year.

The fixed costs are incremental fixed costs which are associated with Project E.

At the end of four years, machinery from the project will be sold for scrap with a value of $400.000

ABC Co has a nominal after-tax cost of capital of 13% per year.

Required:

(a) Calculate the net present value of Project E and comment on the financial acceptability of this project

(b) Calculate the maximum net present value which can be obtained from investing the fund of $10 million, assuming here that the NPV of Project E is zero.

(c) Discuss the reasons why the Board of ABC Co may have decided to limit investment funds for the next year.