Question 1

Suppose you are asked to decide whether a new project should be launched. Based on the projected sales and costs, we expect that the cash flow over the five-year life of the project will be $2,000 in the first two years, $4,000 in the next two, and $5,000 in the last year. It will cost about $10,000 to begin the project. We use a 10 percent discount rate to evaluate new project. Explain your decision in this case?

Question 2

In markets theory, all the projects that add to companys value and increase shareholders wealth should be invested in. However, most companies practice capital rationing as a way to choose the best projects under the existing capital limitations. What are the advantages and disadvantages of capital rationing?

Question 3

The analysis of the financial performance is to determine the meaning and significance of the financial data to check the performance in past, forecast for the future business performance and verifying the financial strength of the organisation. Therefore, there are two procedural groups. Describe each of the group.

Question 4

You have been appointed as a Project Manager for Maya Construction Company. The company is about to select a group of independent projects competing for the companys capital budget of $6.0 million. The firm recognized that its cost of capital is 14%. The company Chief Executive Officer (CEO) has given you the summarized key information (refer to Table 4.1) to be used in selecting the best group of projects.

Table 4.1 Project Information Project	Initial Investment	Internal Rate of Return (IRR)	Present Value (PV) of Inflows at 14%
A	$7,500,000	16%	$7,600,000
B	$ 650,000	17%	$ 950,000
C	$1,800,000	15%	$2,100,000
D	$1,450,000	20%	$1,700,000
E	$ 950,000	25%	$1,150,000
F	$2,400,000	21%	$2,800,000
G	$1,200,000	22%	$1,500,000
H	$ 900,000	19%	$1,000,000

Required:

1) What is capital rationing? In theory, should capital rationing exist? Why does it frequently occur in practice?

2) Apply the internal rate of return (IRR) approach to select the best group of projects.

3) Apply the net present value (NPV) approach to select the best group of projects.

4) Which projects should you recommend to be implemented by the company?