Question

In: Accounting

Asnidah Danial is evaluating a new project for her firm, Kekal Sihat Sdn Bhd. She has...

Asnidah Danial is evaluating a new project for her firm, Kekal Sihat Sdn Bhd. She has

determined that the after-tax cash flows for the project will be RM10,000; RM12,000;

RM15,000; RM10,000; RM7,000; RM8,000 and RM9,000, respectively, for each of the

Years 1 through 7. The initial cash outlay will be RM40,000. DISCOUNT RATE 13%

(a)Pay Back Period (3 markah/marks)

(b) Discounted Pay Back Period (3 markah/marks)

(c) Net Present Value (4 markah/marks)

Solutions

Expert Solution

(a) Pay Back Period

Year Cash flow Cumulative Cash flow
1 RM10,000 RM10,000
2 RM12,000 RM22,000
3 RM15,000 RM37,000
4 RM10,000 RM47,000
5 RM7,000 RM54,000
6 RM8,000 RM62,000
7 RM9,000 RM71,000

Year                     Cashflow

1                             RM10,000 (RM47,000 - RM37,000)

?                             RM3,000    (RM40,000 - RM37,000)

   = RM3,000 / RM10,000 = 0.3 years

Pay Back Period = 3 Years + 0.3 Years = 3.30 Years

(b) Discounted Pay back period

Year Cash flow PVF @ 13% Discounted Cash flow Discounted Cumulative Cash flow
1 RM10,000 0.88500 RM8,850 RM8,850
2 RM12,000 0.78315 RM9,398 RM18,248
3 RM15,000 0.69305 RM10,396 RM28,644
4 RM10,000 0.61332 RM6,133 RM34,777
5 RM7,000 0.54276 RM3,799 RM38,576
6 RM8,000 0.48032 RM3,843 RM42,419
7 RM9,000 0.42506 RM3,826 RM46,245

Year                     Cashflow

1                             RM3,843 (RM42,419 - RM38,576)

?                             RM1,424 (RM40,000 - RM38,576)

   = RM1,424 / RM3,843 = 0.37 years

Discounted Pay Back Period = 5 Years + 0.37 Years = 5.37 Years

(c) Net Present Value

Net Present Value = Discounted cash inflow - Discounted cash outflow
Year Cash flow PVF @ 13% Discounted Cash flow
1 RM10,000 0.88500 RM8,850
2 RM12,000 0.78315 RM9,398
3 RM15,000 0.69305 RM10,396
4 RM10,000 0.61332 RM6,133
5 RM7,000 0.54276 RM3,799
6 RM8,000 0.48032 RM3,843
7 RM9,000 0.42506 RM3,826
0 (RM40,000) 1 (RM40,000)
Net Present Value RM6,245

All the best...


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