Razak is considering two projects:

(Project A requires an initial investment of RM1,500,000 to yield estimated annual cash flows of :

RM150,000 in Year 1

RM 300,000 in Year 2

RM 500,000 in Year 3

RM 200,000 in Year 4

RM 600,000 in Year 5

RM 500,000 in Year 6

RM 100,000 in Year 7

(The appropriate discount rate for this project is 4%.)

Project B requires an initial investment of $3,000,000 to yield estimated annual cash flows of :

RM 100,000 in Year 1

RM 500,000 in Year 2

RM 1,000,000 in Year 3

RM 1,500,000 in Year 4

RM 200,000 in Year 5

RM 500,000 in Year 6

RM 1,000,000 in Year 7

(The appropriate discount rate for this project is 6%.)

Razak is only able to undertake one project. Using the profitability index method, which project should Razak undertake? (15 marks)