Max Real Estate Investment Trust (Max REIT) currently owns only two assets, namely the Mid V Megamall and The G Mall. Both assets are situated in the same location in Kuala Lumpur. Even though both shopping malls are high value assets that are currently generating high returns, the Trustee sees the need to acquire new assets to diversify risks and to grow Max REIT to become a top shopping mall REIT in the Malaysian capital market.

The General Manager has identified a promising acquisition target. It is a newly completed shopping mall in Kelana Jaya that has just started commercial operations. The occupancy rate is currently very low because the existing owner lacks the experience managing a shopping mall. Hence, the existing owner is willing to sell at RM60 million which is below the current market value.

For the period of one year from acquisition date, the shopping mall operation is expected to be loss-making and will incur a negative net cash flow of RM16 million. In the following year, the shopping mall operation is expected to generate positive net cash flow of RM20 million and will grow by 20% per annum for the next three years. After that, growth will be 3% per annum for the next 10 years. All net cash flows are assumed to be incurred at the end of each year. Assuming Max REIT does not pay any corporate taxation and the nominal cost of capital is 10%.

a) Using only Net Present Value as your basis of decision, advise the General Manager on the proposal to acquire the newly completed shopping mall in Kelana Jaya.

b) Explain TWO (2) disadvantages of Net Present Value as the basis of capital budgeting decision.