QUESTION 4

Perry Berhad has to evaluate two new capital budgeting proposals for Costa project and Dina project. The required rate of return on both projects has been established at 12% and the expected free cash flows from each project are follows:

YEAR	COSTA(RM)	DINA(RM)
0	(110000)	(110000)
1	20000	40000
2	30000	40000
3	40000	40000
4	50000	40000
5	70000	40000

REQUIRED:

a) What is the payback period on each project ?If Costa sdn bhd desires a 3 year maximum acceptable payback period, which of these projects should be accepted?

b) Determine the:

i) Net present value (NPV) for each of these projects.

ii) Internal Rate of Return (IRR) for each projects.

iii) Profitability Index(PI) for each of these projects.

c) If there is a capital -rationing constraint, how should the decision being made based on each method?

d) What if there is no capital -rationing constraint, which project should be selected based on each method?