QUESTION 3 (20 MARKS)

(a) State TWO (2) reasons why capital budgeting decision is so important.

(2 marks)

(b) Zamzam Berhad has a project which has the following cash flows:

Year	Project cash flow (RM)
0	(200,000)
1	50,000
2	100,000
3	150,000
4	40,000
5	25,000

The cost of capital is 10 percent. Calculate the projects discounted payback period.

(5 marks)

(c) You are given the following information.

Year	Cash Flow (RM)
0	(100,000)
1	130,000

Using a discount rate of 10 percent, calculate:

i. Net present value

(2 marks)

ii. Profitability index

(2 marks)

(d) Gagah Perkasa Berhad is considering two mutually exclusive projects with depreciable lives of three and six years. The after-tax cash flow for projects A and B are listed below.

Year	Project A	Project B
0	(100,000)	(100,000)
1	51,250	33,126
2	51,250	33,126
3	51,250	33,126
4		33,126
5		33,126
6		33,126

The required rate of return on these projects is 15 percent.

i. Using the net present value (NPV) technique, determine which project should be accepted.

(8 marks)

ii. State your reason.

(1 mark)