FIN5100 Capital Budgeting
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FIN5100 Capital Budgeting
Question 1
Seksyen 8 Ltd has two mutually exclusive projects under consideration. The required return on each is 8 percent. The cash flows are as follows.
|
|
Year |
Project A |
Project B |
|
Investment |
0 |
-RM30,000 |
-RM19,000 |
|
|
1 |
RM12,000 |
RM8,000 |
|
|
2 |
RM12,000 |
RM8,000 |
|
|
3 |
RM12,000 |
RM8,000 |
|
|
4 |
RM12,000 |
RM8,000 |
a. Calculate the payback period for each project.
b. Calculate the discounted payback period for each project.
c. Calculate the NPV for each project.
d. Calculate the IRR for each project.
e. Which project would be selected using the NPV criterion?
f. Which would be selected using IRR?
g. Why do NPV and IRR select different projects?
h. Which project would you select? Why?
Question 2
PCK Ltd has two mutually exclusive projects under considerations. The required investment for each is RM15,000. The required return on each is 16 percent. The cash flows are as follows:
|
Year |
Project A |
Project B |
|
1 |
RM2,000 |
RM8,000 |
|
2 |
RM4,000 |
RM6,000 |
|
3 |
RM7,000 |
RM4,000 |
|
4 |
RM10,000 |
RM2,000 |
|
IRR |
15.2% |
16.1% |
a. Calculate the NPV for each project.
b. Which project would be selected using the NPV criterion? Which would be selected using IRR?
c. Why do NPV and IRR select different projects?
d. Which project would you select? Why?
Question 3
Kimie is working for a company, which supplies shoes equipment for BATA and others shops. Kimie is supposed to advise his managing director on choosing among four projects that shall increase the company’s operating efficiency.
|
Project |
Cost of Investment |
Expected Cash flows per year |
Life of the project |
|
A |
100,000 |
40,000 |
5 |
|
B |
185,000 |
50,000 |
5 |
|
C |
95,000 |
40,000 |
5 |
|
D |
120,000 |
43,000 |
5 |
Kimie was told that each project’s cost of capital is 10%.
(a) Find Profitability Index for each of projects?
(b) If a limit of RM350, 000 is placed on new capital projects, which projects should be selected?
(c) What are advantages and disadvantages of Payback Period?
Question 4
I. YUSRA Berhad is considering two mutually exclusive investment alternatives, both of which cost RM10,000. The firm’s cost of capital is 12%. The after tax cash flows associated with each of the alternatives investment are :
|
Year |
Alternative 1 ( RM ) |
Alternative 2 ( RM ) |
|
1 |
4,000 |
2,000 |
|
2 |
3,000 |
3,000 |
|
3 |
3,000 |
4,000 |
|
4 |
4,000 |
6,000 |
|
5 |
3,000 |
6,000 |
(i) Calculate payback period for each alternative?
(ii) Calculate discounted payback period for each method
(iii) Calculate Net Present Value
(iv) Calculate internal rate of return
(v) Based on your result on which alternative will be selected and why?
II. UTAMA Corporation is considering the following projects. All of which are independent of one another.
|
Project |
Initial Investment Outlay |
Present Value of All Cash Inflows |
|
A |
RM2,600,000 |
RM2,400,000 |
|
B |
2,000,000 |
2,500,000 |
|
C |
800,000 |
940,000 |
|
D |
1,200,000 |
1,400,000 |
|
E |
600,000 |
560,000 |
|
F |
200,000 |
202,000 |
i. Based on the profitability index method, which projects should they accept?
ii. If the management want to choose the best three (3) projects without incurred total cumulative initial investment cost of more than RM2.5 million, which project should the choose?
2022-06-06