Difir Ltd is considering investment options and has identified three potential projects, Project A, Project B and Project C. The projects are different and have varied cash flows. You have been asked to analyse these projects and you came up with the following cash flows in Namibian dollars.
| Project | 0 | 1 | 2 | 3 | 4 | |||||
| A | (50 | 000) | (20 | 000) | 20 | 000 | 40 | 000 | 40 | 000 |
| B | (28 | 000) | (50 | 000) | 40 | 000 | 40 | 000 | 20 | 000 |
| C | (30 | 000) | (30 | 000) | 30 | 000 | 40 | 000 | 10 | 000 |
The cost of the recommended two project will be funded by equity. However, Difir is an all equity
company hence, the cost of equity at 10% is equal to the weighted average cost of capital (WACC).
Required:
a) If there is no capital rationing, which project should be accepted? [9]
b) Which project should be undertaken assume there is a capital rationing in year O. There is only N$60 000 of investment finance that will be available. Assume the projects are divisible.
c) Briefly explain the two forms of capital rationing.
1 Answer