Your division is considering two investment projects, each of which requires an up front expenditure of RM25 million

Finance Jan 04, 2021

Your division is considering two investment projects, each of which requires an up front expenditure of RM25 million. You estimate that the cost of capital is 10 percent and that the investments will produce the following after tax flows: Year Project A (RM) Project B (RM) 1 10 8 2 10 8 3 10 8 4 10 8 (a) Calculate each project's payback period, net present value, and profitability index. (b) Which project or project should be accepted if they are independent?

Expert Solution

Payback
Project A=25/10=2.5000

Project B=25/8=3.1250

NPV
Project A=-25+10/10%*(1-1/1.1^4)=6.6987

Project B=-25+8/10%*(1-1/1.1^4)=0.3589

Profitability Index
Project A=1+6.6987/25=1.2679

Project B=1+0.3589/25=1.0144

Choose both projects as they have positive NPV

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