PDB 41104-Assign 1

Name: LUQMAN NUL HAKIM BIN AHMAD

Student ID No: 58214206018

.1) what is the payback period of a RM40, 000 investments with the following cash flows

Year 1=RM20, 000 Year 4=RM10, 000

Year 2=RM25, 000 Year 5 =RM5, 000
Year 3=RM10, 000

When the net annual cash inflow is the same each year this formula can be used to compute
the payback period:

Investment required
Payback period = Net annual cash inflow
Since the net annual cash flow is different use different method:
1st year >> - 40 000 + 20 000 = -20, 000
2nd year >> - 20 000 + 25 000 = 5, 000

Payback Period = A + (B / C) where

A = Years before final payback year)
B = Total to be paid back - Total Paid back at start of final payback year
C = Total Paid back at the end of final payback year - Total Paid back at the start of the final
payback year

Payback Period = 1 + (40, 000 – 20, 000) / (45, 000 – 20, 000)
= 1.8 years

A) 0.8 years
B) 1.8 years
C) 2.8 years
D) 3.8 years
E) 4.8 years

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2) A NPV of 2 zero implies that an investment’s

A) IRR is greater than the firm’s required rate of return
B) Present value of cash inflows exceeds the investment’s cost
C) Present value of cash inflows is positive
D) Cost exceeds the present value of its cash inflows
E) Cost is equal to the present value of its cash inflows

3) In comparing two projects using NPV profile, at the point where the net present values of the
project are equal, _________________.

A) the interest rate that makes them equal is called the crossover rate
B) the projects both have NPVs equal zero
C) the IRR of each is equal to zero
D) the IRR of each is equal to the cost of capital
E) the IRR exceed the cost of capital

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4) You are considering the following projects but you have limited funds to invest and can’t take
them all. Using the profitability index, rank the projects in the order in which you would
accept them.(i.e. rank them from best to worst) Note that NONE of them are mutually
exclusive projects.
Initial investment NPV
Project A RM100, 000 RM30, 000
Project B RM 80,000 RM25, 000
Project C RM 40,000 RM17, 000

Profitability index = Initial investment + NPV

Initial investment

 Profitability index Project A  Profitability index Project B  Profitability index Project B

= RM100, 000 + RM30, 000 = RM 80,000 - RM25, 000 = RM 40,000 – RM17, 000
RM100, 000 RM 80,000 RM 40,000
= 1.3 = 1.31 = 1.46

Profitability Index Decision Rules

PI Project A = 1.3
 Independent Projects
 Accept Project if PI ≥ 1 PI Project B = 1.31

 Mutually Exclusive Projects PI Project C = 1.48

 Accept Highest PI ≥ 1 Project

A) A,B,C
B) B,A,C
C) C,B,A
D) B,C,A
E) A,C,B

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5) ACME Sdn. Bhd. will invest RM110, 000 in a project that will produce the following cash
flows. The cost of capital is 11%. Should the project be undertaken? Give reasons.
(Note that the fourth year’s cash flow is negative)
Cash Flow (RM)
Year 1 36,000
Year 2 44,000
Year 3 38,000
Year 4 -44,000
Year 5 81,000

 Payback Period
1st year = -110, 000 + 36, 000 = -74, 000
nd
2 year = -74, 000 + 44, 000 = -30, 000
3rd year = -30, 000 + 38. 000 = 8, 000
PP of project = 2 + (110, 000 – 80, 000) / (118, 000 – 80, 000)
= 2.78 years

 NPV = 36, 000 + 44,000 + 38, 000 + (-44, 000) + 81, 000 – 110, 000
4 5
(1.11) (1.11)² (1.11)³ (1.11) (1.11)
= 32, 432 + 35, 711+ 27, 785 – 28, 984+ 48, 070 – 110, 000
= RM 5, 014

 Profitability Index
= 110, 000 + 5, 014
110, 000
= 1.05

The project should be undertaken because:

 Payback period is not to long
 NPV promise a return greater than the required rate of return
 The Profitability Index > 1 so the project is acceptable

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PDB 41104-Assign 1