Modern Fashions, a US multinational, has a subsidiary located in Myanmar. Average-risk projects in this subsidiary have a weighted average cost of capital of 10%, which includes a foreign exchange risk premium. Modern Fashion is considering two mutually exclusive, average-risk projects for its new Myanmar Facility. Each requires an initial investment of MMK 4 million. The projects are expected to produce the following after-tax cash flows;

Project A (MMK) Project B (MMK)

Net Cash Projected Net Net Cash Projected Net

Year Inflows income Inflows income

1 1,500,000 500,000 2,500,000 1,500,000

2 1,500,000 500,000 1,500,000 500,000

3 1,500,000 500,000 1,500,000 500,000

4 1,500,000 500,000 1,100,000 100,000

1. What is the capital budgeting decision method? Describe and explain the methods of capital budgeting? (Write about 500 words) (10 marks)
2. Why should companies use project cash flows rather than accounting income when calculating a projects NPV?(Write about 500 words) (10 marks)
3. What are the projects U.S dollar exchange rates and inflation influences in calculating of NPV? (Write about 500 words) (10 marks)
4. What is the NPV of each project? (5 marks)
5. What is the payback period of each project? (5 marks)
6. What is the Accounting Rate of Return of each project? (5 marks)
7. Which project do you choose? Why? (5 marks)