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Pureit Co is a medium-sized, all equity-financed, unquoted company which specializes in the development and production of water- and air-purifying devices to reduce the emission of effluents. Its small but ingenious R & D team has recently made a technological breakthrough which has revealed a number of attractive investment opportunities. It has applied for patents to protect its rights in all these areas. However, it lacks the financial resources required to exploit all of these projects, whose required outlays and post-tax NPVs are listed in the table below. Pureit's managers consider that delaying any of these projects would seriously undermine their profitability, as competitors bring forward their own new developments. All projects are thought to have a similar degree of risk.

Projects Required outlay NPV
  $ $
A 150,000 65,000
B 120,000 50,000
C 200,000 80,000
D 80,000 30,000
E 400,000 120,000

 

The NPVs have been calculated using as a discount rate the 18% post-tax rate of return which Pureit requires for risky R & D ventures. The maximum amount available for this type of investment is $400,000, corresponding to Pureit's present cash balances, built up over several years' profitable trading. Projects A and C are mutually exclusive and no project can be sub-divided. Any unused capital will either remain invested in short-term deposits or used to purchase marketable securities, both of which offer a return well below 18% post-tax.

Requirements:

a

Advise Pureit Co, using suitable supporting calculations, which combination of projects should be undertaken in the best interests of shareholders; and

Marks: 6
b

Suggest what further information might be obtained to assist a fuller analysis.

Marks: 4
c

Explain how, apart from delaying projects, Pureit Co could manage to exploit more of these opportunities.

Marks: 5
d

Distinguish between hard and soft capital rationing, explaining why a company may deliberately choose to restrict its capital expenditure.

Marks: 5

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 12:00
a
10062
6
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 12:17
b
10064
4
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 12:29
c
10066
5
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 12:35
d
10068
5
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/07/2020 - 20:25
a
9182
6
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/07/2020 - 20:35
b
9186
4
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/07/2020 - 20:44
c
9190
5
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/07/2020 - 20:56
d
9194
5
Apurba nandy's picture
Apurba nandy
03/02/2020 - 18:38
a
5924
6
Apurba nandy's picture
Apurba nandy
12/03/2019 - 22:54
c
5944
5
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/13/2019 - 12:44
a
7960
6 / 6
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/13/2019 - 13:13
b
7962
4 / 4
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/13/2019 - 13:30
c
7964
5 / 5
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/13/2019 - 14:04
d
7966
4 / 5
Abhro Gourab Das's picture
Abhro Gourab Das
09/02/2019 - 15:15
a
7168
6
Subrata Banik's picture
Subrata Banik
09/02/2019 - 15:22
a
7166
6
Ariful islam's picture
Ariful islam
08/24/2019 - 13:42
a
7016
6