ESS GEE Ltd.

Following are the summarized balance sheets of ESS GEE Ltd. as on December, 31 2001 and

2002 which is engaged in investment of number of project.

Liabilities 2001 2002 Assets 2001 2002
Rs. Rs. Rs. Rs.

Share Capital 1,00,000 1,30,000 Land & Building 1,001000 95,000

General Reserve 25,000 30,000 Machinery 75,000 84,500

Profit and Loss A/c 15,200 15,400 Stock 50,000 37,000

Bank Loan (Long-term) 35,000 - Sundry Debtors 40,000 32,100

Sundry Creditors 75,000 67,500 Cash 200 300

Provision for tax 15,000 17,500 Bank - 4,000

Goodwill - 7,500
2.65,200 2.60,400 2.65.200
2,60,400
The cost of capital of ESS GEE Ltd. Is 10 % and it made investment in five projects, whose cash
flows are given in the following matrix
Year 0 1 2 3

Projects:- P1 (100,000) (50,000) (10,000) 70,000

Projects:- P2 (20,000) (60,000) (70,000) 10,000

Projects:- P3 (30,000) Nil (40,000) (80,000)

Projects:- P4 (40,000) (60,000) 50,000 10,000

Projects:- P5 (20,000) (60,000) 50,000 (5,000)

Projects:- P6 (60,000) (20,000) 40,000 20,000

Available 120,000 200,000 Nil Nil

resources

Cash generated by a particular project can also be reinvested in the same

year.
The accounting department of the organization has also computed the NPV of
all the projects at 10% discount rate which is given in the following table
Projects NPV at 10% discount rate

P1 20,000
P2 15,000

P3 20,000

P4 15,000

P5 20,000

P6 10,000

Formulate the above problem as LPP if the objective of the organization is to

maximize NPV within given resources. Also find out the optimum mix of
investment keeping in mind that the cost of capital is 10%. If ESS GEE Ltd.
has surplus money of Rs. 200,000 then in which project it is to be invested.