the company is in a capital rationing position, the projects are divisible and only £4,500,000 is available for investment in year 0

In capital rationing situations, companies have limited resources available for investment, making it crucial to prioritize projects based on their expected returns. The fact that the projects are divisible means that the company can invest in fractions of projects rather than committing its entire budget to a single venture. Below are the steps you can follow to analyze investment opportunities under these conditions:

1. Break Down the Problem

   1. Identify potential projects along with their expected cash flows and costs.
   2. Determine the required rate of return for each project.
   3. Calculate the Net Present Value (NPV) for each project.

2. Relevant Concepts

   • Net Present Value (NPV): This is calculated using the formula: $NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t}$ where $C_t$ is the cash inflow at time $t$, $r$ is the discount rate, and $n$ is the total number of periods.

3. Analysis and Detail

   1. Compute the NPV for each project over its period.
   2. Rank projects based on their NPVs.
   3. Since only £4,500,000 is available, consider combinations of projects, including fractions of them if necessary, to maximize total NPV within the budget.

4. Verify and Summarize

   1. Ensure that the total investment does not exceed £4,500,000.
   2. Confirm that the selected projects offer the highest possible total NPV based on the investment.

Final Answer

After calculating NPVs for potential projects, select the combinations that maximize NPV without exceeding the budget of £4,500,000. Always assess the sustainability of the investments and associated risks. If specific projects and their cash flows were provided, you could analyze them further to determine the best investment strategy.