Subject name: corporate finance

KOMO Bhd needs to choose between two mutually exclusive investment projects each lasting for five years. The company uses the straight line method of depreciations and its cost of capital is 12%.

Project A would generate annual cash inflows of RM150,000 after the purchases of plant and machinery costing RM500,000 with a scrap values after five years of RM50,000.

Project B would generate annual cash inflows of RM400,000 after the purchase of plant and machinery costing RM 1,500,000 with a scarp value after five years of RM 250,000.

a) Calculate for each project the payback period, the net present value (NPV) and internal rate of return (IRR)

b) State which project, you would recommend. Give your reasons.