Millennium Sdn Bhd is analyzing two mutually exclusive capital budgeting projects. Project 1 will require an initial outlay of RM25 million, while Project 2 would require RM28 million. Both projects are expected to have a useful life of four years. The annual differential after tax cash flows of the two projects depend highly on the forecasted economic performance. The cash flows of the projects are as follows:

Economic condition	Probability	Annual after tax cash flows
		Project 1	Project 2
Recession	0.2	RM8 million	RM15 million
Normal	0.6	RM10 million	RM12 million
Boom	0.2	RM12 million	RM5 million

a) Based on the above information, calculate the following for each of the project:

i. Expected return

ii. Standard deviation

iii. Coefficient of variation

b) If the company decided to use 12% for the less risky project and 20% for the higher risk project, calculate the net present value of each project. Which project would the

company undertake?. Why?

c) If the projects are independent projects, should the company accept both projects? Why?.

Answer rating: 100% (QA)

a i Expected Return Project 1 Annual After Tax Expected Particulars Probability Cash Flows Cash Flow ... View the full answer