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A division of Bewcast plc has been allocated a fixed capital sum by the main board of directors for its capital investment during the next year....

      

A division of Bewcast plc has been allocated a fixed capital sum by the main board of directors for its
capital investment during the next year. The division's management has identified three capital
investment projects, each potentially successful, each of similar size, but has only been allocated enough
funds to undertake two projects. Projects are not divisible and cannot be postponed until a later date.
The division's management proposes to use portfolio theory to determine which two projects
should be undertaken, based upon an analysis of the projects‟ risk and return. The success of
the projects will depend upon the growth rate of the economy. Estimates of project returns at different
levels of economic growth are shown below:
fig5224451.png
You are required:
(a) to use the above information to evaluate and discuss which two projects the division is likely to
undertake. All relevant calculations must be shown.
(b) What are the weaknesses of the evaluation technique used in (a) above, and what further information
might be useful in the evaluation of these projects?
(c) Suggest why portfolio theory is not widely used in practice as a capital investment evaluation technique.
(d) Recommend, and briefly describe, an alternative investment evaluation technique that might be
applied by the division.

  

Answers


Kavungya
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Kavungya answered the question on April 22, 2021 at 13:54


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