QUESTION 2 (14 MARKS) Abu Ilyas Engineering is considering including two pieces of equipment, a CONVEYOR BELT and an overhead FORKLIFT system, in this year's capital budget. The projects are independent. The initial cash outlay for the CONVEYOR BELT is SR22.000 and that for the FORKLIFT system is SR22.430. The firm's REQUIRED RATE OF RETURN is 17%. The company has set its maximum pay-back-period cut off to be 3 years. After-tax free cash flows are as follows: CONVEYOR BELT SR22,000 SR8,780 SR6,540 SR8,700 SR9,500 FORKLIFT SR22,430 SR8,500 SR8,680 SR7,500 SR7,500 Calculate: A) Payback Period for FORKLIFT PROJECT ONLY. (2 marks) B) Net Present Value for CONVEYOR BELT PROJECT ONLY (3 marks) C) Profitability Index for both CONVEYOR BELT PROJECT and FORKLIFT project (2 marks) D) Write the summary of your calculations above in the shaded area of the tables below for each of the project and their decision (5 marks) CONVEYOR BELT Project Project's Value Comparison 3 years Decision ACCEPT 2.78 years Method Payback Period Net Present Value Profitability Index IRR 18.76% 17% FORKLIFT Project Method Project's Value Decision Payback Period Net Present Value Profitability Index years -$118.83 Comparison 3 years 0 REJECT 1 IRR 16.68% 17% E) If the projects are mutually exclusive, which project to be accepted and why? (2 marks) QUESTION 3 (13 MARKS A firm is considering the following projects, all of which are independent of one another. Available funds are limited to SR3 million only in this capital budgeting period, but future periods will have no capital budget constraints. ACCEPT Project Initial Capital Outlay in SAR Total Present Value of Future Free Cash Flows in SAR NPV in SAR PI IRR REJECT AB 500,000 575,000 75,000 1.150 14.75% ACCEPT CD 900,000 1,044,000 1.160 12.32% EF 800,000 900,000 10.25% GH 300,000 50,000 1.167 11.25% | ACCEPT IJ . 600,000 590,000 -10,000 0.983 9.20% KL 700,000 900,000 200,000 15.15% ACCEPT MN 600,000 280,000 1.467 13.00% A. FILL the shaded areas in the table above with appropriate values and ACCEPT / REJECT decision. (5 marks) B. ACCORDING TO NPV CRITERIA, which projects would be selected base on the capital rationing constraint above? CALCULATE THE TOTAL NPV VALUE for the selected projects according to this ranking. (3 marks) NPV RANKING 1 2 3 PROJECT TOTAL NPV VALUE FOR SELECTED SET OF PROJECTS ACCORDING TO NPV = CRITERIA FY-SAR SAR C. ACCORDING TO PROFITABILITY INDEX (P.I) CRITERIA, which projects would be selected base on the capital rationing constraint above? CALCULATE THE TOTAL NPV VALUE for the selected projects according to this ranking. (3 marks) P.I RANKING 5 PROJECT CD TOTAL NPV VALUE FOR SELECTED SET OF PROJECTS ACCORDING TOP.I = | SAR CRITERIA D. From you calculation in B and C, Which set of projects would you choose under this capital constraint and explain why. (2 marks)