QUESTION 2 (25 MARKS)

Consider two mutually exclusive projects Project X and Project Y with identical initial outlays

of RM90,000 and depreciable lives of 5 years. Project X is expected to produce free cash

flows of RM32,787 each year. Project Y is expected to generate a single after-tax net cash

flow of RM223,880 in year 5. The cost of capital is 15 percent.

Required:

(a) Calculate the net present value for each project.

(b) Determine the internal rate of return for each project.

(c) Compute the payback period for each project.

(d) In a situation where there is capital rationing, calculate the profitability index (PI) for

both projects and rank them accordingly. Based on your PI calculations above, identify

the problems you foresee in selecting one of the projects. Select the best project based

on Capital Budgeting Valuation Techniques above.