Medan Jaya Bhd$.$ is considering two mutually exclusive projects, project R and project S$,$ to add to its operating capacity. Both projects have $10-$year lives. The firm$$s financial analyst has developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table:

Project R

Initial Investment : RM$10,000$

Outcome : Annual cash inflows

Pessimistic : RM $500$

Most likely : RM $1,500$

Optimistic : RM $3,000$

Project S

Initial Investment : RM$10,000\mathrm{.}00$

Outcome : Annual cash inflows

Pessimistic : RM $900$

Most likely : RM $1,500$

Optimistic : RM $2,700$

a$)$ Determine the range of annual cash inflows for each project.

b$)$ Assume that the firm$$s cost of capital is $8\%,$ calculate the NPVs associated with each outcome for each project and determine the range of NPVs for each project.

c$)$ Which project do you recommend? Discuss your recommendation based on the risk$-$return trade$-$offs of the projects.

QUESTION $2$

a$)$ A company wants to make the best investment$-$financing decision that will maximize shareholders$$ wealth. It earns net profits after tax of RM$5$ million and $30\%$ is paid out as dividends. It has a target capital structure of $30\%$ long$-$term debt, $10\%$ preferred stock, and $60\%$ equity. The cost of capital schedule is given below, as well as the cost and return on three prospective projects.

Cost of capital schedule

Source : Debt After tax cost : $8\%$

Source : Preferred stock After tax cost : $11\%$

Source : Retained earnings After tax cost : $12\mathrm{.}5\%$

Source : New common stock After tax cost : $16\%$

Prospective projects

Projects : A Investment : $3,000,000$ Return $12\%$

Projects : B Investment : $5,000,000$ Return $14\%$

Projects : C Investment : $1,500,000$ Return $16\%$

i$)$ How much retained earnings is available for investment in the new projects?

ii$)$ Determine break point in total capital associated with exhaustion of retained earnings.

iii$)$ Develop the weighted marginal cost of capital $($WMCC$)$ schedule

iv$)$ Which project$($s$)$ should be accepted and how much is the optimal investment? Explain your answer.