Here, candidates had to calculate the maximum NPV that could be obtained from investing the $10 million allocated by the Board of the company.

Since the Board required Project E to be undertaken, only $5 million was available to be invested in the four remaining projects once $5 million was allocated to Project E. The limit placed on investment funds by the Board had therefore placed the company in a capital rationing situation, as there were insufficient funds to undertake all four remaining projects. As these projects were all divisible, ranking by profitability index and investing the $5 million accordingly would lead to the optimal investment decision.

There seemed at times to be some uncertainty about the profitability index, which was occasionally referred to as return on capital employed, the probability index and the profit index. The correct approach was to divide the sum of the present values of future cash flows by the initial investment, or to divide the NPV by the initial investment. Both methods were acceptable.

Projects B and D were mutually exclusive, so either one or the other could be selected for investment, but not both. Some candidates showed by their answers that they were not sure what mutually exclusive meant, as they incorrectly included both projects B and D.

A number of answers discussed at length how to calculate the maximum NPV, when the question requirement was not to discuss it, but to calculate it. Additional marks were not available for such discussions.