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Millennium Sdn Bhd is analyzing two mutually exclusive capital budgeting projects. Project 1 will require an initial outlay of RM25 million, while Project 2 would

Millennium Sdn Bhd is analyzing two mutually exclusive capital budgeting projects. Project 1 will require an initial outlay of RM25 million, while Project 2 would require RM28 million. Both projects are expected to have a useful life of four years. The annual differential after tax cash flows of the two projects depend highly on the forecasted economic performance. The cash flows of the projects are as follows:

Economic condition

Probability

Annual after tax cash flows

Project 1

Project 2

Recession

0.2

RM8 million

RM15 million

Normal

0.6

RM10 million

RM12 million

Boom

0.2

RM12 million

RM5 million

a) Based on the above information, calculate the following for each of the project:

i. Expected return


ii. Standard deviation


iii. Coefficient of variation


b) If the company decided to use 12% for the less risky project and 20% for the higher risk project, calculate the net present value of each project. Which project would the

company undertake?. Why?


c) If the projects are independent projects, should the company accept both projects? Why?.

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