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

Zeta plc has a single-period capital constraint of $500,000 available now. Projects are divisible and cannot be repeated. Project A: investment $200,000, NPV $50,000. Project B: investment $250,000, NPV $75,000. Project C: investment $300,000, NPV $60,000. Which allocation maximises total NPV?

Rank divisible projects by NPV per dollar of capital: B 0.30, A 0.25, C 0.20. Take all of B and A, using $450,000, then spend the remaining $50,000 on one-sixth of C. Total NPV is $135,000, the maximum under the single-period constraint.

  1. AAll of A and B, and 1/6 of C, total NPV $135,000Correct
  2. BAll of B and C, total NPV $135,000 but exceeding the budget
  3. CAll of A and C, total NPV $110,000
  4. DAll of B and 100% of A, with nothing else, total NPV $125,000

Explanation

Rank by profitability index (NPV per $ invested): A 0.25, B 0.30, C 0.20. Fund B ($250,000) first, then A ($200,000), leaving $50,000 for C, which is 1/6 of C giving NPV $10,000. Total = 75,000 + 50,000 + 10,000 = $135,000. Option 4 ignores the leftover $50,000 which can be used on divisible C.

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