ACC200122R
Section A
Answer the compulsory question from Section A.
Question 1
Blue Ocean Plc is considering six project proposals. They are summarised
below:
Project
A
B
C
D
E
F
Initial
Investment
(£000)
15
30
10
13
18
20
Annual
Revenue
(£000)
22
32
20
18
8
16
Annual Fixed
Costs
(cash outflows)
(£000)
4
11
6
8
2
4
Life of the
project
(years)
3
5
4
10
15
10
Variable costs (cash outflows) are 40 per cent of annual revenue. Projects D and
E are mutually exclusive. Each project can only be undertaken once, and each is
divisible.
Assume:
•
•
•
•
•
The cash flows are confined to within the lifetime of each project.
The cost of capital is 10 per cent.
No inflation. No tax.
All cash flows occur on anniversary dates.
The firm has a limit of £100,000 for investment new projects at Time 0.
Required:
a.
b.
c.
Calculate the net present value of the above six projects.
(18 marks)
What is the optimal allocation amongst the proposed projects considering the
firm’s budget limit?
(5 marks)
What is the maximum net present value obtainable?
(2 marks)
Total: 25 marks
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