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ACCA Strategic Professional · Advanced Financial Management · Discounted cash flow techniques

Harbin plc has $100,000 available at time 0 only. The projects below are indivisible and cannot be repeated. X: outlay $60,000, NPV $14,000. Y: outlay $40,000, NPV $10,000. Z: outlay $50,000, NPV $12,000. W: outlay $30,000, NPV $7,000. Which combination maximises total NPV, and what is that NPV?

X and Y together give the highest NPV of $24,000 for the full $100,000. When projects are indivisible, ranking by profitability index may not be optimal, so all feasible combinations must be compared. The index ranking would select Y and Z for only $22,000.

  1. AX and Y, NPV $24,000Correct
  2. BY and Z, NPV $22,000
  3. CX and W, NPV $21,000
  4. DZ and W, NPV $19,000

Explanation

With indivisible projects, every affordable combination must be tested. X+Y costs $100,000 for $24,000, Y+Z costs $90,000 for $22,000, X+W costs $90,000 for $21,000, and Z+W costs $80,000 for $19,000. Ranking by profitability index would pick Y and Z, which leaves $10,000 unused and gives a lower NPV.

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