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Demand for such accommodation is buoyant and the company anticipates no problems in
finding future tenants at the same annual rent.
(vii)
A market research survey into the potential for the film production business cost K50m
Required:
(a) Using DCF analysis, calculate the Net Present Value of the proposed investment. (Workings
should be rounded to the nearest Km.) All workings must be shown in Excel worksheet which
should be embedded in Word document. All assumptions made should be outlined
(25
marks).
(b) In addition to the possible purchase of the film-making business, the company has two other
investment opportunities, the details of which are given below:
Post-Tax Cash Flows, Kmillion
Investment X
Investment Y
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
(300)
(200)
200
80
200
180
250
140
150
140
150
40
150
40
The Pangani Company has a total of K500million available for capital investment in the current year.
No project can be invested in more than once.
Required:
(i)
Define the term profitability index, and briefly explain how it may be used when a
company faces a problem of capital rationing in any single accounting period.
(6
marks)
(ii)
Calculate the profitability index for each of the investment projects available to the
Pangani Company, i.e. purchase of the film production company, Investment X and
Investment Y, and outline the optimal investment strategy. Assume that all of the projects
are indivisible. This should also be presented in Excel worksheet embedded in Word
document.
(15marks)
(iii)
Explain the limitations of using a profitability index in a situation where there is capital
rationing.
(4 marks)
(Total 50 marks)