CHAPTER 9 : CAPITAL BUDGETING

QUESTION 1

Ali Corporation is planning to make an investment of RM360.000 in one of the three (3)

alternatives shopping centers in Selangor. Each projects expected cash flows from the

investment are as follows (in RM):

Year Supermarket ASupermarket BSupermarket C

1144,000120,00096,000

2144,000120,000108,000

396,000120,000138,000

496,000120,000168,000

The company cost of capital is 12% and these projects are mutually exclusive.

a) Calculate the following:

i.Payback period for the three (3) projects.

ii.Net Present Value for the three (3) projects.

iii. Which projects should be selected and state your reasons.

QUESTION 2

Sue Rie Berhad is considering two mutually exclusive projects, SS and MM whose involve in an investment cost of RM400,000. The cost of capital is 12% and expected cash flow for each project is given below:

Year Project SS (RM) Project MM (RM)

1150,000180,000

2150,000180,000

3150,000140,000

4150,000120,000

a) Calculate the followings:

i) Payback period for both projects.

ii) Net Present Value for the two projects.

iii) Internal rate of Return for Project SS only.

iv) Which project should be accepted? Why?

b) Define the word "initial outlay".