Question 3 (20 marks)

(a) Why is the capital budgeting decision crucial and important for a firm? State why the capital budgeting errors are so costly? (4 marks)

(b) Discuss risk adjustments in capital budgeting. (6 marks)

(c) Powerbank Berhad is considering two projects; A and B. The initial cash outlay associated with project A is RM50,000 and B is RM70,000. The required rate of return for both projects is 12% and below is the expected annual free cash flows from each project.

YEAR	PROJECT A (RM)	PROJECT B (RM)
0	-50,000	-70,000
1	12,000	13,000
2	12,000	13,000
3	12,000	13,000
4	12,000	13,000
5	12,000	13,000
6	12,000	13,000

Calculate the following:

i) Net Present Value (3 marks)

ii) Profitability Index (3 marks)

iii) Internal Rate of Returns (3 marks)

iv) Which project should be accepted? (1 marks)