Question 1

You are the financial manager at XHL Ltd. The following information relates to three possible capital expenditure projects that are up for selection. However, due to capital rationing, the budget on capital expenditure has been set at RM450,000. The projects are not divisible and may not be postponed until a future period. After the projects end it is unlikely that similar investment opportunities will occur.

Projects

A B C

Initial cost RM200,000 RM205,000 RM180,000

Expected life 5 years 5 years 4 years

Scrap value expected RM10,000 RM15,000 RM8,000

Expected cash inflows (RM) (RM) (RM)

End year 1 80,000 100,000 55,000

2 70,000 70,000 65,000

3 65,000 50,000 95,000

4 60,000 50,000 100,000

5 55,000 50,000

The company estimates its cost of capital is 18%.

Required:

(a) Prepare a financial appraisal of the above projects using the net present value and profitability index methods. (12 marks)

(b) Which project / projects would you recommend for selection. Justify your reasons clearly. (5 marks)

(c) Emphasize TWO (2) non-financial factors that management would need to consider before making a final decision on the project / projects to be selected. Discuss this clearly.