1. Gerimis Bhd. is considering two mutually exclusive projects with widely differing lives. The company’s cost of capital is 10 percent. The project cash flows are summarized below:
| Project A | Project B | |
| Initial Investment | ( 79,510) | ( 89,104) |
| Year | ||
| 1 | 19,810 | 22,108 |
| 2 | 19,810 | 22,108 |
| 3 | 19,810 | 22,108 |
| 4 | 19,810 | 22,108 |
| 5 | 19,810 | 22,108 |
| 6 | 19,810 | 22,108 |
| 7 | 19,810 | 22,108 |
| 8 | 19,810 | 22,108 |
| 9 | 19,810 | 22,108 |
| 10 | 19,810 | 22,108 |
You are required to calculate and choose the project that Gerimis Mengundang should take by using:
(a) Payback period technique
(b) Net Present Value (NPV) technique
(c) Profitability Index (PI) technique
2. You are a financial analyst for Delux Bhd. The CEO of this company has asked you to analyse two capital investment projects, that is Project X and Y. Each project costs RM 55,000 and the cost of capital for each project is 15%. The projects’ expected cash flows are as follows:
| Expected Cash Flows | ||
| Year | Project X | Project Y |
| 0 | (RM 55,000) | (RM 55,000) |
| 1 | RM 15,000 | RM 20,000 |
| 2 | RM 15,000 | RM 20,000 |
| 3 | RM 15,000 | RM 20,000 |
| 4 | RM 15,000 | RM 20,000 |
| 5 | RM 15,000 | RM 20,000 |
Based on the information given, calculate:
- Payback period for both project
- Net present value (NPV) for both project
- Profitability index (PI) for both projects
- Which project should be selected? Explain your answer.
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