QUESTION 4 a Determine FIVE (5) reasons why payback period method cannot be recommended as the main method used by a company to assess potential investment projects marks) b In an effort to expand its activities in the local market, Paradigm Engineering Sdn Bhd is considering two mutually exclusive projects, one with a four year life and the other with a six year life Both projects require an initial outlay of RM140,000 The annual after tax cash flows of the projects are as follows Year Project Rain (RM) Project Kain (RM) 1 50,000 40,000 2 50,000 40,000 3 50,000 40,000 4 50,000 40,000 5 40,000 6 40,000 Assume that the policy of the company is to demand a required rate of return of 10 on any investment in the project Required Compute the following capital budgeting measures for both projects Payback Period (4 marks) Net Present Value (6 marks) Internal Rate of Return (6 marks) iv Based on the information derived from the above calculations (i, ii and iii), evaluate which of the two projects the company should select Justify the rationale for your selection (4 marks)

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QUESTION 4 a. Determine FIVE (5) reasons why payback period method cannot be recommended as the main method used by a company to assess potential

QUESTION 4

a. Determine FIVE (5) reasons why payback period method cannot be recommended as the main method used by a company to assess potential investment projects.

marks)

b. In an effort to expand its activities in the local market, Paradigm Engineering Sdn. Bhd. is considering two mutually exclusive projects, one with a four-year life and the other with a six-year life. Both projects require an initial outlay of RM140,000. The annual after-tax cash flows of the projects are as follows:

Year	Project Rain (RM)	Project Kain (RM)
1	50,000	40,000
2	50,000	40,000
3	50,000	40,000
4	50,000	40,000
5	-	40,000
6	-	40,000

Assume that the policy of the company is to demand a required rate of return of 10% on any investment in the project.

Required:

Compute the following capital budgeting measures for both projects:

Payback Period. (4 marks)

Net Present Value. (6 marks)

Internal Rate of Return. (6 marks)

iv. Based on the information derived from the above calculations (i, ii and iii), evaluate which of the two projects the company should select. Justify the rationale for your selection.

(4 marks)