Question

Swee Rien Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of RM1,500,000. The company’s board of directors has set a maximum 4-year payback requirement and has set its cost of capital at 9.50 percent. The cash inflows associated with the two projects are shown in the following table.

Cash inflows (CFt)

Year	Project A (RM)	Project B (RM)
1	450,000	750,000
2	450,000	600,000
3	550,000	300,000
4	400,000	350,000
5	450,000	250,000
6	450,000	300,000

a) Find the payback period for each project.
b) Calculate the NPV of each project at 9.50 percent.
c) Compute the Profitability Index.
d) Derive the IRR of each project.
e) Rank the projects by each of the techniques used. Make and justify a recommendation.

Answer 1

As per rules I am answering the first 4 subparts of the question

	Project A	Project B
Payback	3.13	2.50
NPV	$530,308.09	$490,127.14
PI	1.35	1.33
IRR	20.81%	22.86%

Workings

Year	Project A (RM)	Cumulative CF	Project B (RM)	Cumulative CF
0	-1500000	-1500000	-1500000	-1500000
1	450,000	-1,050,000	750,000	-750,000
2	450,000	-600,000	600,000	-150,000
3	550,000	-50,000	300,000	150,000
4	400,000	350,000	350,000	500,000
5	450,000	800,000	250,000	750,000
6	450,000	1,250,000	300,000	1,050,000