(CAPITAL BUDGETING)

QUESTION 3

Mohd Azrin Basirum as a financial manager analyzed two projects. The cost of capital is 12% and expected cash flows for each project are given as follows:

Year PROJECT A (RM) PROJECT B (RM)

0 10,000 10,000

1 7,000 4,000

2 3,500 4,000

3 3,000 4,000

4 1,500 4,000

1. Calculate the followings:

1. Payback period for the two projects. (4 marks)

2. Net Present Value for the two projects. (6 marks)

3. Internal rate of return for Project B only. (4 marks)

4. Which project would be selected and state your reasons. (2 marks)

2. List two disadvantages of using the payback period as a capital budgeting tool. (2 marks)

3. What does the term 'mutually exclusive' mean? (2 marks)