5.2 D'Arcy (Builders) Ltd is considering three possible investment projects: A, B and C.The expected pattern of cash flows for each project is:Initial outlay1 year's time2 years' time3 years' time4 years' timeProject cash flowsB£m(20)12(a) divisible(b) indivisible?A£m(17)11576776C£m(24)991113The business has a cost of capital of 10 per cent and the investment budget for next yearis £25 million.Required:Which investment project(s) should the business undertake assuming each project is:

Capital rationing is a situation where a company cannot invest in all profitable projects, even…

Answered: Which investment project(s) should the…

Business

Finance

Which investment project(s) should the business undertake assuming each project is: (a) divisible (b) indivisible?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

5.2 D'Arcy (Builders) Ltd is considering three possible investment projects: A, B and C.
The expected pattern of cash flows for each project is:
Initial outlay
1 year's time
2 years' time
3 years' time
4 years' time
Project cash flows
B
£m
(20)
12
(a) divisible
(b) indivisible?
A
£m
(17)
11
5
7
6
7
7
6
C
£m
(24)
9
9
11
13
The business has a cost of capital of 10 per cent and the investment budget for next year
is £25 million.
Required:
Which investment project(s) should the business undertake assuming each project is:

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shares on January 1. Promise paid $300,000 and issued $200,000 in long-term liabilities and paid Promise also agreed to pay $80,000 to the former owners of SaidSo contingent on meeting certain revenue goals during the following year. Promise estimated the present value of its probability adjusted expected payment for the contingency or contingent obligation at $30,000 in legal fees. $23,000 Precombination book values for SaidSo, Inc. are as follows: 80,000 90,000 175,000 Current assets 24 Equipment Buildings Goodwill 33,000 $378,000 Total $ (45,000) (180,000) (115,000) (138,000) 100,000 $(378,000) Current liabilities 2$ Common stock Retained earnings Revenues Expenses Total Promise's appraisal of SaidSo found two balance sheet accounts that differed from fair value. Equipment was undervalued by $15,000 and Buildings by $5,000. Promise noted that SaidSo has unrecorded client contracts worth $60,000 and résearch and development activity in process with an appraised fair value of $90,000
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