Capital Budgeting Procedures
UNIVERSITI TUNKU ABDUL RAHMAN
FACULTY OF BUSINESS AND FINANCE
ACADEMIC YEAR 2015 / 2016
TUTORIAL 9
Learning Outcome:-
On completion of this unit, a student shall be able to:
Explain the role of capital budgeting techniques in the capital budgeting process.
Calculate, interpret and evaluate payback period, net present value, profitability index and internal rate of return.
9-1 What are the most commonly used capital budgeting procedures?
Why is capital-budgeting decision so important? Why are capital-budgeting errors so costly?
9-2 The treasurer of Anthony Press. has projected the cash flows of projects A, B, and C as follows. The required rate of return on both projects is 12 %.
Year
Project A
Project B
Project C
0
(RM100,000)
(RM200,000)
(RM100,000)
1
70,000
130,000
75,000
2
70,000
130,000
60,000
a. Compute the profitability indices for each of the three projects.
b. Compute the NPV for each of the three projects.
c. Suppose these three projects are independent. Which project (s) should Anthony accept based on the profitability index rule?
9-3 Jojo is reviewing a project with an initial cash outflow of RM250,000. An additional RM100,000 will have to be invested after the first year, followed by an additional investment of RM50,000 at the end of the second year. Beginning at the end of year three, the project is expected to generate cash flows of RM90,000 per year for the next eight years. Calculate the project’s payback period, net present value (NPV), and internal rate of return (IRR) at a cost of capital of 8 percent.
Year
Cash Flows
Cumulative
(RM)
0
(250,000)
(250,000)
1
(100,000)
(350,000)
2
(50,000)
(400,000)
3
90,000
(310,000)
4
90,000
(220,000)
5
90,000
(130,000)
6
90,000
(40,000)
7
90,000
50,000
8
90,000
9
90,000
10
90,000
9-4 Lesley Sdn. Bhd. is attempting to evaluate the feasibility of investing RM95,000 in
FACULTY OF BUSINESS AND FINANCE
ACADEMIC YEAR 2015 / 2016
TUTORIAL 9
Learning Outcome:-
On completion of this unit, a student shall be able to:
Explain the role of capital budgeting techniques in the capital budgeting process.
Calculate, interpret and evaluate payback period, net present value, profitability index and internal rate of return.
9-1 What are the most commonly used capital budgeting procedures?
Why is capital-budgeting decision so important? Why are capital-budgeting errors so costly?
9-2 The treasurer of Anthony Press. has projected the cash flows of projects A, B, and C as follows. The required rate of return on both projects is 12 %.
Year
Project A
Project B
Project C
0
(RM100,000)
(RM200,000)
(RM100,000)
1
70,000
130,000
75,000
2
70,000
130,000
60,000
a. Compute the profitability indices for each of the three projects.
b. Compute the NPV for each of the three projects.
c. Suppose these three projects are independent. Which project (s) should Anthony accept based on the profitability index rule?
9-3 Jojo is reviewing a project with an initial cash outflow of RM250,000. An additional RM100,000 will have to be invested after the first year, followed by an additional investment of RM50,000 at the end of the second year. Beginning at the end of year three, the project is expected to generate cash flows of RM90,000 per year for the next eight years. Calculate the project’s payback period, net present value (NPV), and internal rate of return (IRR) at a cost of capital of 8 percent.
Year
Cash Flows
Cumulative
(RM)
0
(250,000)
(250,000)
1
(100,000)
(350,000)
2
(50,000)
(400,000)
3
90,000
(310,000)
4
90,000
(220,000)
5
90,000
(130,000)
6
90,000
(40,000)
7
90,000
50,000
8
90,000
9
90,000
10
90,000
9-4 Lesley Sdn. Bhd. is attempting to evaluate the feasibility of investing RM95,000 in