QUESTION 2

The Utah Mining Corporation is evaluating two projects, Project A and Project B near Provo, Utah. According to the treasurer, Mr Great Gatsby, This is a golden opportunity. Project A will cost RM 35 million to operate while Project B going to cost RM 50 million. He also estimated that the projects will have an economic life of 3 years. You have taken the info to Mr Mike, the companys financial officer. He then asks you to perform an analysis of the projects and present him recommendation on which project to be choose.

You have used the estimated data provided by Mr Gatsby to determine the revenue that could be expected from the projects. Utah has 10 percent required rate of return on both projects. The expected cash flows for both projects are shown in the following table.

Year	Project A (RM,000)	Project B (RM,000)
0	-35,000	-50,000
1	15,000	21,700
2	10,000	21,700
3	20,000	21,700

You are required to:

1. Compute Payback Period for each project,

(4 marks)

2. Net Present Value (NPV) for each project

(6 marks)

3. Internal Rate of Return for Project A and Project B

(12 marks)

4. Profitability Index

(4 marks)

5. Based on your answer above, which project should be chosen. Justify your answer.

(4 marks)

[Total: 30 marks]