Calculate the payback period

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QUESTION - You are a CFO of an international investment firm based in Kuching, Sarawak. You have been assigned to evaluate and inform the management on three mutually exclusive projects financing which is scheduled to begin next year.

Based on the preliminary evaluation, the projected cash flows are summarised in the following table. The cost of borrowing to finance the project is currently at 10%.

Cash Flows forecast (RM'000)

Year

Pontianak Project

Brunei Project

Balikpapan project

0

130,000

120,000

150,000

1

50,000

42,000

40,000

2

50,000

42,000

48,000

3

55,000

42,000

65,000

4

63,000

42,000

80,000

5

40,000

42,000

70,000

Total inflows

258,000

210,000

303,000

Required -

a) Calculate the payback period (PP), the net present value (NPV), the profitability index (PI) and the internal rate of returns for each project.

b) Determine the rankings of the three stores based on your findings in (a) and also stating the decision criteria in each method.

c) Since it is a mutually exclusive decision, the CEO favors the project with the highest IRR. What do you think the company should do, and why? (You may also suggest your personal insights of the risks that may be associated with the divisions proposed).

Reference no: EM133039286

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