QUESTION 3 [25 MARKS] Fisca Ltd is considering two independent projects, Project A and Project B. The initial cash outlay associated with Project A is P50,000 and the initial cash outlay associated with Project B is P70,000. The required rate of return on both projects is 12%. The expected annual free cash flows from each project are as follows: Year PROJECT A PROJECT B 0 -P50,000 -P70,000 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

Required: a. For both projects, calculate i. The net present value. (6 marks)

ii. The internal rate of return. (8 marks)

iii. The profitability index. (4 marks)

b. Assuming there is capital rationing, advise Fisca ltd which project should be accepted over the other. (2 marks) DIPLOMA Sessional Structured Timed Assessment July December BBF621 Business Finance BOU 2021 Page 7 of 7 c. Explain the limitations of using a profitability index in a situation where there is capital rationing. (5 marks)