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QUESTION 2 Fluffy Cotton Products, Inc. is considering investing in either of two competing new product development that will allow the firm to eliminate a
QUESTION 2 Fluffy Cotton Products, Inc. is considering investing in either of two competing new product development that will allow the firm to eliminate a production bottleneck and meet the growing demand for its current products. The firm's engineering department narrowed the alternatives down to Unicorn (UNI) or Rainbow (BOW) projects. Working with the accounting and finance personnel, the firm's Chief Financial Officer developed the following estimates of the cash flows for UNI and BOW products over the relevant 7 year time horizon. The firm has an 11 % required return and views these new products as equally risky. The initial capital requirement for these products are RM 2.3 million. YEAR 1 2 3 Unicorn (UNI) RM 400,000 400,000 400,000 550,000 550,000 550,000 550,000 Rainbow (BOW) RM 250,000 320,000 455,000 575,000 630,000 755,000 880,000 4 5 6 7 Based on the information above, answer the following questions. Please show all your workings in details inclusive the formula used. a. What is the Net Present Value (NPV) of each of the product? (6 marks) b. What is the Profitability Index (PI) of each of the product? (6 marks) c. What is the Internal Rate of Return (IRR) of each of the product? (3 marks) d. What is the Payback Period (PP) of each of the product? (6 marks) e. Based on your analysis, which product should the firm invest? Justify. (1 marks) f. Briefly discuss what are three (3) capital budgeting issues and challenges faced by the firm. (3 marks) TOTAL 25 MARKS
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