question archive (c) X-Gentrepreneur Berhad is currently evaluating the feasibility of investing RM95,000 in a piece of equipment that has a 5-year life
(c) X-Gentrepreneur Berhad is currently evaluating the feasibility of investing RM95,000 in a piece of equipment that has a 5-year life
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(c) X-Gentrepreneur Berhad is currently evaluating the feasibility of investing RM95,000 in a piece of equipment that has a 5-year life. The company has estimated the cash inflows associated with the proposal as shown in the following table. The board of directors has set a maximum 3-year payback requirement. The cost of capital is 12%. Year 1 2 3 4 5 Cash inflows (RM) 20,000 25,000 30,000 35,000 40,000 This final assessment paper consists of 4 questions on 10 printed pages. 8 UBFF2013 BUSINESS FINANCE Section B Q2. (c) (Continued) (1) Calculate the payback period for the proposed investment. (2 marks) Compute the net present value (NPV) for the proposed investment. (4 marks) Calculate the internal rate of return (IRR) for the proposed investment. (4 marks) (iv) Evaluate the acceptability of the proposed investment using Payback period, NPV, and IRR. What recommendation would you make relative to implementation of the project? Why? (6 marks) [Total: 30 marks)
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(i) payback period = 3.57 years
(ii) NPV = 9080.6
(iii) IRR = 15.36%
(iv) according to payback period project is rejected , acceptable rate is 3 years
according to NPV project should be accepted since it is positive
according to IRR project should be accepted since it is greater than WACC
project should be accepted as in case of conflicting results NPV is given priority.
| PROJECT RM | ||||
| CASH FLOWS | PV FACTOR @12% | PV OF CASH FLOWS | ||
| YEAR 0 | -95000 | -95000 | ||
| YEAR 1 | 20000 | 0.893 | 17857.14 | |
| YEAR 2 | 25000 | 0.797 | 19929.85 | |
| YEAR 3 | 30000 | 0.712 | 21353.41 | |
| YEAR 4 | 35000 | 0.636 | 22243.13 | |
| YEAR 5 | 40000 | 0.567 | 22697.07 | |
| ROR | 12.0% | NPV = | 9080.60 | |
| pay back period = | 3.57 years | =NO. OF YEARS TAKEN TO EARN THE COST INCURRED | ||
| IRR = | 15.36% | =IRR(VALUES) |
