Financial management revision question & answer

XYZ Ltd has six independent projects whose financial data is as follows:


All the projects are divisible. The firm‟s policy is to utilize only retained profits to finance its projects. Currently the firm has only KSh.800,000 to finance the projects.
Show how the available capital should be invested. The firm‟s cost of capital is 15%.
ANSWER
Compute the present value and profitability index (P.I) for each project.


Project E should be rejected since its P.I is less than 1.0. The available capital is then allocated on the basis of P.I ranking.

The first 3 projects requires Sh.560,000 (60,000 + 160,000 + 340,000). To exhaust sh.800,000 we require Sh.240,000 from next best project i.e. project B. therefore, the portion of project B to undertake:

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