Capital Rationing

Degnis Co (Mar/June 16, amended)

Degnis

Degnis Co is a company which installs kitchens and bathrooms to customer specifications. It is planning to invest $4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements.

Degnis Co expects motorhome production and sales in the first four years of operation to be as follows.

Pureit Co*

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.

Project E (6/14, amended)

Project E is a strategically important project which the Board of OAP Co have decided must be undertaken in order for the company to remain competitive, regardless of its financial acceptability. The project has a life of four years. Information relating to the future cash flows of this project are as follows: