Al Huda Company (AHU) has been growing very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the last few years has been 21%, and AHU managers believe that 21% is a reasonable figure for the firms cost of capital. To sustain a high growth rate, the AHU CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firms production capacity, and the second project involves introducing one of the firms existing products into a new market. Cash flows from each project appear in the following table.

Years	Expansion options (AED)	Existing product to the new market (AED)
0	-3500, 000	-500,000
1	1500,000	250,000
2	2000,000	350,000
3	2500,000	375,000
4	2750,000	425,000

What is capital budgeting? What is the difference between independent and mutually exclusive projects?

Calculate the Payback period, NPV, IRR, and PI for both projects.

What is the main disadvantage of discounted payback? Is the payback method of any real usefulness in capital budgeting decisions?

Rank the projects based on their NPVs, IRRs, and PIs.

Do the rankings in part b agree or not? If not, why not?

What is the underlying cause of ranking conflicts between NPV and IRR?

The firm can only afford to undertake one of these investments, and the CEO favors the product introduction because it offers a higher rate of return (that is, a higher IRR) than the plant expansion. What do you think the firm should do? Why?

AHU CEO has a third option to produce NEW Product as a third project and the cash flow will be like below. Which project you can advise among three of them. You can use the same methods as in b.

Years	Starting New Product (AED
0	-800,000
1	270,000
2	256,000
3	400,000
4	500,000