Question

Simson Berhad has three mutually exclusive projects under consideration. The expected cash flows are given in the following table. The minimum required rate of return on any project chosen by Simson bhd is 10.5%.

	Project A	Project B	Project C
Initial Investment RM	484m	682m	467m
Years	Cash Flows RM in million
1	128	150	95
2	241	265	239
3	115	246	216
4	105	227	96
5	95	94	53
6	15	26	12
Environment restoration cost	50	73	44

The government, regulators and NGOs insist that the company should restore the environment to the pre-project scenario, the company accountant estimates the above restoration costs at the end of year six.

• Based on internal rate of return (IRR) and target rate of 10.5% which project you will accept from the above three?
• Based on profitability Index which project is selected? (2.5 marks)

Answer 1

Using IRR rule, Project C will be chosen as it has the highest IRR among all the projects

Using PI rule also, Project C will be chosen as it has the highest Profitability Index

Formulae

Formulae as above