MC6122 QUESTION 1 (20 points) icked Technology Sdn Bhd (WTSB) is considering the

Question

MC6122 QUESTION 1 (20 points) icked Technology Sdn Bhd (WTSB) is considering the following two mutually exclusive projects: Year Cash Flow Project A (RM Cash flow Project B (RM -260,000 5,000 15,000 15,000 425,000 40,000 2 3 4 45,000 5,000 500 500 Risk-free rate-4%, return on stock market index-12% and beta for the company project should the firm choose if you? 1.375. Which a) Apply the payback criterion. Why? b) Apply the discounted payback criterion. Why? c) Apply the NPV criterion. Why? d) Apply the IRR criterion. Why? e) Apply the profitability index criterion. Why? Based on your answer in (a) through (e), which project would you finally choose? Why ESTION 2 (25 points) and will be deprec

Explanation / Answer

The advantage to using the NPV method over IRR is the above example is that NPV can handle multiple discount rates without any problems. Each year's cash flow can be discounted separately from the others making NPV the better method. Project A to be selected as per NPV

A Payback criterion= Time period in which project will be able to payback the initial investment Term Project A Payback amount Payback period (months) Project B Payback amount Payback period (months) Initial Investment -260000 -40000 1 5000 5000 12 45000 40000 (12/45000)*40000 = 10.7 months or 0.9 yrs 2 15000 5000+15000 20000 24 5000 3 15000 20000+15000 35000 36 500 4 425000 260000-35000 225000 (12 months/425000)* (260000-35000) 36+6.4 = 42.4 months or 3.5 yrs 500 Project B to be selected because its Payback period is less (0.9 yr<3.5 yrs) B Discounted Payback criterion= Time period in which project will be able to payback the initial investment (cashflows present value ot be considered for payback amount) Term Project A Payback amount Project B Payback amount Initial Investment -260000 PVF = 1/(1+Rf)^n Present value of Payback amount Payback period (months) -40000 PVF = 1/(1+Rf)^n Present value of Payback amount 1 5000 0.96 4808 4808 12 45000 0.96 43269 (12 months/43269)*40000 11 months or 0.9 2 15000 0.92 13868 18676 24 5000 3 15000 0.89 13335 27203 36 500 4 425000 0.85 363292 232797 (12 months/363292)*232797 8 + 36 = 44 months 3.7 yr 500 Project B to be selected because its Payback period is less (0.9 yr<3.7 yrs) C NPV = sum of present values of all cashflows - initial investment Project A Project B -260000 PVF = 1/(1+Rf)^n Present value of cashflow -40000 PVF = 1/(1+Rf)^n Present value of cashflow 5000 0.96 4808 45000 0.96 43269 15000 0.92 13868 5000 0.92 4623 15000 0.89 13335 500 0.89 444 425000 0.85 363292 500 0.85 427 Total 395303 48764 NPV= 395303-260000= 135303 48764-40000= 8764 Project A to be selected because its NPV is greater D IRR IRR is rate at which NPV is "0" = 0 = net cash inflow (present value) during the period t - initial investment = Project A Project B IRR (trial and error to use 16% as IRR) to get NPV "0" [(5000/(1+16%)^1)+(15000/(1+16%)^2)+(15000/(1+16%)^3)+(425000/(1+16%)^4)]-260000 = 0 IRR (trial and error to use 24% as IRR) to get NPV "0" [(45000/(1+24%)^1)+(5000/(1+24%)^2)+(500/(1+24%)^3)+(500/(1+24%)^4)]-40000 = 0

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