Question 1

Phoenix Jaya Bhd. is evaluating an investment opportunity in Philippines. The cost of this investment would be 150 million Philippines pesos (PP). The expected cash inflows from this project would be 40 million PP per year for the first and second year, and 60 million per year PP for the third and fourth year. The company's required return on investment is 16%. The risk-free interest rate in Malaysia is 3.5% and the risk-free interest rate in Philippines is 5%. The current spot exchange rate is 100 PP/RM7.5300

The beta factor of this investment is 3.0. The company targeted capital structure is 60% equity and 40% debt. The cost of debt after tax is 8%. The market rate of return is 10%.

Required:

1. Calculate the NPV of the investment in ringgit (Home Currency Approach). Should

Phoenix Jaya Bhd. accept this investment? (21 Marks)

1. What would be the impact of this investment if the interest rate in Philippines was less than the interest rate in Malaysia? (4 Marks)