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1) Ali Corporation is planning to make an investment of RM360
1) Ali Corporation is planning to make an investment of RM360.000 in one of the three (3)
alternatives shopping centers in Selangor. Each projects expected cash flows from the
investment are as follows (in RM):
Year Supermarket A Supermarket B Supermarket C
1 144,000 120,000 96,000
2 144,000 120,000 108,000
3 96,000 120,000 138,000
4 96,000 120,000 168,000
The company cost of capital is 12% and these projects are mutually exclusive.
a) Calculate the following:
i) Payback period for the three (3) projects.
ii) Net Present Value for the three (3) projects.
iii) Which projects should be selected and state your reasons.
2) Sue Rie Berhad is considering two mutually exclusive projects, SS and MM whose involve in an investment cost of RM400,000. The cost of capital is 12% and expected cash flow for each project is given below:
Year Project SS (RM) Project MM (RM)
1 150,000 180,000
2 150,000 180,000
3 150,000 140,000
4 150,000 120,000
a) Calculate the followings:
i) Payback period for both projects.
ii) Net Present Value for the two projects.
iii) Internal rate of Return for Project SS only.
iv) Which project should be accepted? Why?
b) Define the word "initial outlay".
Expert Solution
1-i) Payback period ;
Supermarket A = 2.75 years
Supermarket B = 3.00 years
Supermarket C = 3.11 years
ii) Net present value ;
Supermarket A = 12,707.99
Supermarket B = 4,481.92
Supermarket C = 16,803.94
iii) If the projects are mutually exclusive the project that have lower payback period should be accepted. So, the project Supermarket A should be accepted because it has lower payback period.
when the projects are mutually exclusive the project that highest NPV should be accepted. So, the project Supermarket C should be accepted because it has highest NPV.
We should accept the project on the basis of NPV because it depends on time value of money. So, the project Supermarket C should be accepted.
2-i) Payback period ;
Project SS = 2.67 years
Project MM = 2.29 years
ii) Net present value ;
Project SS = $55,602.40
Project MM = $80,120.59
iii) Internal rate of return (IRR) for project SS = 18.45%
iv) If the projects are mutually exclusive the project that have lower payback period should be accepted. So, the project MM should be accepted because it has lower payback period.
when the projects are mutually exclusive the project that highest NPV should be accepted. So, the project MM should be accepted because it has highest NPV.
when the projects are mutually exclusive the project that highest IRR should be accepted. So, the project MM should be accepted because it has highest IRR.
So, the project MM should be accepted.
b) An initial outlay refers to the initial investments needed in order to begin a given project. A company's management will decide to pursue certain projects based on strategic value.
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