Question

Question B1

Dayang Inc is planning to make an investment of RM300,000 in one of the three alternative shopping centres in Kedah. Each project's expected cash flows from the investment are as follows (in RM):

Year Jaya          Midi          Teko
1      154,000 110,000 86,000
2      134,000 110,000 110,000
3        96,000 110,000 128,000
4        96,000 110,000 178,000

The company's cost of capital is 10% and these projects are mutually exclusive.

REQUIRED:

(a) Calculate the following:

(i) Payback period for the three projects.                    
(ii) Net Present Value for the three projects.        
Which would be selected? State your reasons.      

(b) Find the internal rate of return for the best alternative.

Answer 1

a)

1:

Jaya:

Cumulative cash low for year 0 = -300,000

Cumulative cash low for year 1 = -300,000 + 154,000 = -146,000

Cumulative cash low for year 2 = -146,000 + 134,000 = -12,000

Cumulative cash low for year 3 = -12,000 + 96,000 = 84,000

12,000 / 96,000 = 0.125

Payback period of Jaya = 2 + 0.125 = 2.125 years

Midi:

Payback period of Midi = 300,000 / 110,000

Payback period of Midi =2.727 years

Teko:

Cumulative cash low for year 0 = -300,000

Cumulative cash low for year 1 = -300,000 + 86,000 = -214,000

Cumulative cash low for year 2 = -214,000 + 110,000 = -104,000

Cumulative cash low for year 3 = -104,000 + 128,000 = 24,000

104,000 / 128,000 = 0.813

Payback period of Teko = 2 + 0.813 = 2.813 years

2)

Jaya:

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = -300,000 + 154,000 / (1 + 0.1)¹ + 134,000 / (1 + 0.1)² + 96,000 / (1 + 0.1)³ + 96,000 / (1 + 0.1)⁴

Net present value of jaya= $88,439.31

Midi:

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = -300,000 + 110,000 / (1 + 0.1)¹ + 110,000 / (1 + 0.1)² + 110,000 / (1 + 0.1)³ + 110,000 / (1 + 0.1)⁴

Net present value of Midi= $48,685.20

Teko:

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = -300,000 + 86,000 / (1 + 0.1)¹ + 110,000 / (1 + 0.1)² + 128,000 / (1 + 0.1)³ + 178,000 / (1 + 0.1)⁴

Net present value of Teko = $86,835.60

b)

The best alternative is JAYA as it has the highest NPV.

Internal rate of return is the rate that makes initial investment equal to present value of cash inflows.

300,000 = 154,000 / (1 + r)¹ + 134,000 / (1 + r)² + 96,000 / (1 + r)³ + 96,000 / (1 + r)⁴

Using trial and error method, i.e after trying various values for R , let's try R as 24.47%

300,000 = 154,000 / (1 + 0.2447)¹ + 134,000 / (1 + 0.2447)² + 96,000 / (1 + 0.2447)³ + 96,000 / (1 + 0.2447)⁴

300,000 = 300,000

Therefore, IRR is 24.47%