Reference no: EM132600068

Banau Berhad is evaluating two mutually exclusive capital budgeting projects. Both projects require the same amount of initial outlay totaling RM15 million. Both projects are expected to have a useful life of five years. However, the annual differential cash flows of the two projects are highly uncertainty, depending on economic performance. The forecasted annual tax differential cash flows over the projects' lives are as follows:

              Economic condition Probability             Annual after tax cash flows

                          Project A                                      Project B

Recession               0.3 RM3 million                      RM7 million

Normal                   0.5 RM5 million                      RM5 million

Boom                    0.2 RM8 million                       RM3 million

Question a) Based on the above information, calculate the following for each of the project:

i. Expected return

ii. Standard deviation

iii. Coefficient of variation

Question b) If the company decided to use 15% for the less risky project and 24% for the higher risk project, calculate the net present value of each project. Which project would the company undertake? Why?

Question c) If the projects are independent projects, should the company accept both? Why?