QUESTION 3 (20 Marks)

Qent Berhad has two development projects to consider, namely City A and City B. The invested capital amount is RM550 million.

Following is the estimated net cash flows for each project for the next five years (RM Mil).

	Year 1	Year 2	Year 3	Year 4	Year 5
City A	-250	-200	-50	250	380
City B	-350	-150	200	380	450

The invested capital is raised at debt to equity ratio of 3:5. The required return on the debt is 6%. The treasury bond rate is 5% and the required rate of return of portfolio (comprising of all shares in the Stock Exchange) is 9%. Corporate tax rate is 30%.

Required:

Determine which project Qent Berhad will accept. Justify your answer for each of the case below:

Net present value method using:

a) Weighted Average Cost of Capital (WACC)

b) Internal Rate of Return (IRR)