The secretary of the Sri Melaka Golf Club has been approached by a well known international golfer who wishes to retire to the area. The proposal is that the club will purchase a house next to the...

The secretary of the Sri Melaka Golf Club has been approached by a well known international golfer who wishes to retire to the area. The proposal is that the club will purchase a house next to the golf course for RM500,000, and in addition, pay salary of RM25,000 per annum for five years for which the golfer will give tuition to members. The house will become the property of the golfer. The benefits to the club will be increased membership and charging of higher subscriptions, particularly by local businesses. Estimated figures are as follows:

Year         Additional Subscription Income  Additional Membership Expenses

                                    RM                                                     RM

1                                   180,000                                        40,000

2                                    250,000                                      25,000

3                                   300,000                                       10,000

4                                   250,000                                             -

5                                    150,000                                             -

Ideally the club would like a 15% return on this investment.

Required:

a. Calculate the net present value, internal rate of return, accounting rate of return and payback period, of the planned investment project.

b. Critically evaluate the importance of relevant cost in capital budgeting.