B & E Sdn Bhd is evaluating three (3) projects for its expansion. However, due to the
Question:
B & E Sdn Bhd is evaluating three (3) projects for its expansion. However, due to the financial constraint, the company can only invest in one (1) project. Detail information relating to the projects is given below:
(i) Project H3
- Initial investment is RM420,000
- Useful life is 7 years
- Salvage value at the end of seven years is zero
- Additional information is as follows:
Year 1 (RM) | Year 2 (RM) | Year 3 (RM) | Year 4 (RM) | Year 5 (RM) | Year 6 (RM) | Year 7 (RM) | |
After tax cash inflow | 315,000 | 351,000 | 330,000 | 349,000 | 360,000 | 395,000 | 407,000 |
After tax cash outflow | 195,000 | 221,000 | 190,000 | 199,000 | 200,000 | 225,000 | 227,000 |
Depreciation | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 | 60,000 |
(ii) Project K4
- Initial investment is RM600,000
- Useful life is 6 years
- Salvage value at the end of six years is RM60,000
- Additional information is as follows:
Year 1 (RM) | Year 2 (RM) | Year 3 (RM) | Year 4 (RM) | Year 5 (RM) | Year 6 (RM) | |
Net after tax cash flow | 120,000 | 120,000 | 120,000 | 120,000 | 120,000 | 120,000 |
Depreciation | 90,000 | 90,000 | 90,000 | 90,000 | 90,000 | 90,000 |
(iii) Project N5
- Initial investment is RM570,000
- Useful life is 6 years
- Salvage value at the end of six years is zero
- Additional information is as follows:
Year 1 (RM) | Year 2 (RM) | Year 3 (RM) | Year 4 (RM) | Year 5 (RM) | Year 6 (RM) | |
Net after tax cash flow | 105,000 | 125,000 | 160,000 | 180,000 | 245,000 | 355,000 |
Depreciation | 95,000 | 95,000 | 95,000 | 95,000 | 95,000 | 95,000 |
Note:
The company's required rate of return for each project is 22%.
Present Value of $1
Periods | 5% | 20% | 22% | 28% |
1 | 0.952 | 0.833 | 0.820 | 0.781 |
2 | 0.907 | 0.694 | 0.672 | 0.610 |
3 | 0.864 | 0.579 | 0.551 | 0.477 |
4 | 0.823 | 0.482 | 0.451 | 0.373 |
5 | 0.784 | 0.402 | 0.370 | 0.291 |
6 | 0.746 | 0.335 | 0.303 | 0.227 |
7 | 0.711 | 0.279 | 0.249 | 0.178 |
Present Value of Annuity of $1
Periods | 5% | 20% | 22% | 28% |
1 | 0.952 | 0.833 | 0.820 | 0.781 |
2 | 1.859 | 1.528 | 1.492 | 1.392 |
3 | 2.723 | 2.106 | 2.042 | 1.868 |
4 | 3.546 | 2.589 | 2.494 | 2.241 |
5 | 4.329 | 2.991 | 2.864 | 2.532 |
6 | 5.076 | 3.326 | 3.167 | 2.759 |
7 | 5.786 | 3.605 | 3.416 | 2.937 |
Required:
(a) Compute the payback period for each project.
(b) Compute the accounting rate of return (ARR) for each project.
(c) Compute the net present value (NPV) for each project.
(d) Compute the internal rate of return (IRR) for each project.
(e) Compute the profitability index (PI) for each project.
(f) Determine which project the company should choose? Why?
Managing Business Ethics Making Ethical Decisions
ISBN: 9781506388595
1st Edition
Authors: Alfred A. Marcus, Timothy J. Hargrave