A firm is considering an investment project that requires an initial outlay of RM5,000,000. The project is expected to provide cash inflows of RM1,800,000 in year 1, RM1,900,000 in year 2, RM1,700,000 in year 3 and RM1,300,000 in year 4.

a) What is the net present value (NPV) for the project if its cost of capital is 15%?

b) What is the profitability index (PI) for the project?

c) Why is NPV considered to be a superior method of evaluating the cash flows from a project?

d) Although it is conceptually unsound, the payback period is very popular in business as a criterion for assigning priorities to investment projects. Why is it unsound and why is it popular?

pur-new-sol

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