Required: а. Calculate the net present value of investment Project A by showing the cash flow calculation on the investment. Calculate the net present value of investment Project B by showing the cash flow calculation on the investment. b. Advise the managing director on which project to be chosen as a good investment decision by stating your reason. с.
Required: а. Calculate the net present value of investment Project A by showing the cash flow calculation on the investment. Calculate the net present value of investment Project B by showing the cash flow calculation on the investment. b. Advise the managing director on which project to be chosen as a good investment decision by stating your reason. с.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Ukir Berhad is a furniture manufacturing company. Currently, the managing director is
thinking of investing in two mutually exclusive investment projects. Project A requires an
initial investment cost of RM40,000 while Project B requires an initial investment cost of
RM30,000. The revenues and operating cost (which would be incurred at the end of each
year) for the next four years are estimated to be as follows:
PROJECT A
Variable costs (RM)
Revenues (RM)
Fixed costs (RM)
Year 1
13,000
18,000
7,000
9,000
12,000
12,000
1,000
2,000
3,000
Year 2
Year 3
35,000
25,000
Year 4
1,000
PROJECT B
Variable costs (RM)
IT TT
Fixed costs (RM)
Revenues (RM)
22,000
Year 1
12,000
21,000
4,000
3,000
Year 2
38,000
8,000
5,000
Year 3
16,000
9,000
2,000
Year 4
1,000
Both projects will have a useful life of four years. It is estimated that Project A and Project
B would have a salvage value of RM3,000 and RM1,000 respectively at the end of year 4.
As funds are limited, only one investment alternative can be chosen.
The company's cost of capital is 16% and the relevant discount rates are as follows:
Year 1
Year 2
Year 3
Year 4
PVIF
0.862
0.743
0.641
0.552
Required:
Calculate the net present value of investment Project A by showing the cash flow
calculation on the investment.
а.
Calculate the net present value of investment Project B by showing the cash flow
calculation on the investment.
b.
Advise the managing director on which project to be chosen as a good investment
decision by stating your reason.
С.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education