(a) Determine the initial capital of Project A and Project B.
(b) If Project A and Project B are mutually exclusive, calculate the Net Present Value (NPV) of Project A and Project B given that the cost of capital is 5%. Based on the NPV method, explain with reason which project should be invested.
(c) Axis Sdn. Bhd.’s current investment policy is to accept only investments that are recoverable within 3 years.
Calculate the discounted payback period of Project A and Project B if the cost of capital is 5%. Based on the calculated discounted payback period of Project A and Project B, advise the company on which new project to select if they are mutually exclusive.
(d) The discounted payback rule could reject good long-term projects and can easily mis-rank competing projects. Based on the discounted payback calculation, give THREE (3) reasons and explain why this method can lead to nonsensical decisions.
(e) If the cost of capital increases to 15%, calculate the NPV of Project A and Project B. Explain FIVE (5) reasons why changes in the cost of capital can cause conflicting results using NPV and IRR methods.
(f) Many firms still use the internal rate of return rule instead of net present value. When used properly, the two rules lead to the same decision, but the internal rate of return rule has several pitfalls that can trap the unwary.
Explain with reasons, THREE (3) pitfalls of using the internal rate of return rule in appraising capital investment.
Extracted text: Kenny Goh of Axis Sdn. Bhd. is considering two potential projects, Project A and Project B, for investment purpose. Project A is pertaining to the construction of a plant to manufacture fertilizers and Project B is involved in the manufacturing of a new consumer product. The forecasted cash inflows and outflows of the two projects are given below: Project A (RM' million) Inflows 200 Project B (RM' million) Outflows Year Outflows Inflows 1 150 80 60 200 160 120 80 200 180 160 150 3 150 100 4 200 140 The internal rate of return (IRR) of Project A and Project B are 24 percent per year and 20 percent per year respectively. Both projects require initial capital in year 0 and have a cost of capital of 5 percent per year.