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Capital Budgeting


Question 1 (a) Baker plc has the following projects: Projects Initial Investment NPV (after tax), £ A A 100,000 15000 B B 150,000 18000 C C 75,000 7000 D D 50,000 6500 The company has only £250,000 available at year 0. There is no other investment opportunity for the firm with any spare cash which is not invested in the above 4 projects. Question: 1a. Assume that all projects above are infinitely divisible. Explain, with supporting calculations, which projects the company should choose to maximise its value? What is the optimal NPV of the investment plan? (3 marks) 2a. Would your advice to the management be different if these projects are not infinitely divisible? What would be the NPV of the revised investment plan? (2 marks)