A firm is considering an investment project that requires an initial outlay of RM10,000,000. The project...
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A firm is considering an investment project that requires an initial outlay of RM10,000,000. The project is expected to provide net cash flows of RM6,500,000 in year 1, RM3,000,000 in year 2, RM3,000,000 in year 3 and RM1,000,000 in year 4. 5. a) Calculate the net present value (NPV) for the project if its cost of capital is 15%. (7) b) Calculate the payback period for the project. (3) c) Why is NPV considered to be a superior method of evaluating the cash flows from a project? (5) d) Although it is conceptually unsound, the payback period is very popular in business as a criterion for assigning priorities to investment projects. Why is it unsound and why is it popular? (5) A firm is considering an investment project that requires an initial outlay of RM10,000,000. The project is expected to provide net cash flows of RM6,500,000 in year 1, RM3,000,000 in year 2, RM3,000,000 in year 3 and RM1,000,000 in year 4. 5. a) Calculate the net present value (NPV) for the project if its cost of capital is 15%. (7) b) Calculate the payback period for the project. (3) c) Why is NPV considered to be a superior method of evaluating the cash flows from a project? (5) d) Although it is conceptually unsound, the payback period is very popular in business as a criterion for assigning priorities to investment projects. Why is it unsound and why is it popular? (5)
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