Compute the following capital budgeting measures for both projects: i. Payback Period. ii. Net Present Value. iii. Internal Rate of Return. iv. Based on the information derived from the above calculations (i, ii and ii), evaluate which of the two projects the company should select. Justify the rationale for your selection.
Compute the following capital budgeting measures for both projects: i. Payback Period. ii. Net Present Value. iii. Internal Rate of Return. iv. Based on the information derived from the above calculations (i, ii and ii), evaluate which of the two projects the company should select. Justify the rationale for your selection.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:QUESTION 4
Determine FIVE (5) reasons why payback period method cannot be recommended
as the main method used by a company to assess potential investment projects.
а.
In an effort to expand its activities in the local market, Paradigm Engineering Sdn.
Bhd. is considering two mutually exclusive projects, one with a four-year life and the
other with a six-year life. Both projects require an initial outlay of RM140,000. The
annual after-tax cash flows of the projects are as follows:
b.
Year
Project Rain (RM)
Project Kain (RM)
50,000
50,000
50,000
50,000
40,000
40,000
40,000
40,000
40,000
40,000
1
2
3
4
6.
Assume that the policy of the company is to demand a required rate of return of 10%
on any investment in the project.
Required:
Compute the following capital budgeting measures for both projects:
i.
Payback Period.
ii.
Net Present Value.
iii.
Internal Rate of Return.
iv.
Based on the information derived from the above calculations (i, ii and ii),
evaluate which of the two projects the company should select. Justify the
rationale for your selection.
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