Question

Yaya Enterprise is a construction business owns by Maria and Zakaria. They are considering two investment appraisals: Initial investment Revenue for year 1 Year 1 variable operating costs Annual fixed operating costs Kerja Project (RM) 100,000 150,000 25,000 11,500 Raya Project (RM) 300,000 170,000 65,000 12,000 Projected life for Kerja Project is 2 years, while Raya Project is 4 years. It is estimated that for future years: 1. Revenue will increase by 12% annually for Kerja and Raya projects. 2. Both projects will experience an increase of 5% annually for variable operating costs. 3. The fixed operating costs will remain the same in year 1 and 2 for both projects, then in year 3 there will be an increase of RM500 for Raya. 4. The annual depreciation for Kerja and Raya is 1,500 and RM1,000 respectively. The depreciation expense has been included in fixed operating costs. 5. The company is entitled for 20% initial allowance and 15% annual allowance. 6. Salvage value for Kerja is RM25,000, while Raya will no value at the end of its estimated life. 7. The company's cost of capital is 14%, and tax rate is 25%. Required: a) Calculate Net Present Value for both projects b) Discuss two (2) benefits of using net present as investment appraisal