Judy recently went to work for Amex Group, a tourism company. Amex’s CEO has handed him the estimated cash flows for two proposed projects for island in Terengganu, Khapas Island and he indicate that this project is a mutually exclusive project. There are two purpose projects which Project SELESA (build new chalets) and Project INDAH (renovate current chalets). His time frame for this project is 5 years. For these projects, sources of capital are come from a mix of capital structure (30% of debt and 70% of equity) to finance their project’s cost. Amex company will issuing a-10years bond with 10% coupon rate and selling price at RM950. Tax rate = 30%. Meanwhile, a 4%-risk free rate, risk premium of 5% and 2.0 for company beta. The project’s expected net cash flows are as follows:) YEAR Project SELESA Project INDAH 0 (RM12,000,000) (RM7,600,000) 1 4,800,000 3,200,000 2 4,800,000 3,200,000 3 4,800,000 3,200,000 4 4,800,000 3,200,000 5 4,800,000 3,200,000 Management requires a minimum return of 18% in order for the project to be acceptable. Management requires projects with this type of risk to have a minimum payback of 2.0 years. His decision will be on calculations for the payback method, the discounted payback method, net present value and internal rate of return in his analysis. (Hint: First determine Weighted Average Cost of Capital)
Judy recently went to work for Amex Group, a tourism company. Amex’s CEO has handed him the estimated cash flows for two proposed projects for island in Terengganu, Khapas Island and he indicate that this project is a mutually exclusive project. There are two purpose projects which Project SELESA (build new chalets) and Project INDAH (renovate current chalets). His time frame for this project is 5 years. For these projects, sources of capital are come from a mix of capital structure (30% of debt and 70% of equity) to finance their project’s cost. Amex company will issuing a-10years bond with 10% coupon rate and selling price at RM950. Tax rate = 30%. Meanwhile, a 4%-risk free rate, risk premium of 5% and 2.0 for company beta. The project’s expected net cash flows are as follows:)
|
YEAR |
Project SELESA |
Project INDAH |
|
0 |
(RM12,000,000) |
(RM7,600,000) |
|
1 |
4,800,000 |
3,200,000 |
|
2 |
4,800,000 |
3,200,000 |
|
3 |
4,800,000 |
3,200,000 |
|
4 |
4,800,000 |
3,200,000 |
|
5 |
4,800,000 |
3,200,000 |
Management requires a minimum return of 18% in order for the project to be acceptable. Management requires projects with this type of risk to have a minimum payback of 2.0 years.
His decision will be on calculations for the payback method, the discounted payback method,
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