$(4$ marks$)$ Question $9($Capital Budgeting$)$

ABC Company is considering a new product line to supplement its range line. It is anticipated

that the new product line will involve cash investment of $$700,000$ at time $0$ and $$1\mathrm{.}0$ million in

year $1.$ After$-$tax cash inflows of $$250,000$ are expected in year $2,$$$300,000$ in year $3,$$$350,000$

in year $4,$ and $$400,000$ each year thereafter through year $10.$ Though the product line might be

viable after year $10,$ the company prefers to be conservative and end all calculations at that

time.

a$)$ If the required rate of return is $15$ percent, what is the net present value $($NPV$)$ of the

project? Is it acceptable?

b$)$ What is its profitability index $($PI$)$ of the project?

c$)$ What would be the case if the required rate of return was $10$ percent?

d$)$ What is the project's payback period? Is it acceptable?

e$)$ Briefly compare and contrast the NPV$,$ PI$,$ and IRR criteria. What are the advantages and

disadvantages of using each of these methods?