Question

Question 2 Untuk terus berdaya saing, syarikat pembekal untuk sebuah syarikat semikonduktor terkemuka perlu melabur untuk platform 'big data'. Anggaran ekonomi untuk setiap pakej ditunjukkan dalam Jadual Q2 di bawah. To remain competitive, a supplier for a huge semiconductor company has to invest for a big data platform. The economic estimates for each package are shown in Table Q2 below Jadual S2/Table Q2 Pakei Package Pelaburan permulaan Initial investment Penerimaan tahunan Annual receipts Perbelanjaan tahunarn Annual expenses Jangka hayat (tahun) System life (years) RM 4,500 RM 1,500 RM 150 RM 9,000 RM 3,000 RM 300 RM 18,000 RM 5,000 RM 1,500 10 Berdasarkan Jadual S2 diatas, jawab soalan-soalan berikut Based on Table Q2 above, answer the following questions: a) Sediakan gambarajah aliran tunai bagi setiap alternatif dengan dengan jelas Present the cashflow diagram for each alternative clearly (3 markah/marks) b) Pilih pakej terbaik dengan menggunakan kaedah PW. MARR yang digunakan adalah 15% setahun, dan pakej yang dipilih perlu berkhidmat selama 10 tahun. Anggapkan pengulangan. Jelaskan dengan nyata kenapa anda mencadangkan pilihan tersebut. Select the best package by using the PW method. The MARR is 15% per year, and the package chosen must provide service for 10 years. Assume repeatability. Clearly state the reason behind your recommendation. (4 markahlmarks) c) Sahkan cadangan yang anda perolehi dalam S2(b) dengan menggunakan kaedah IRR dalam menilai alternatif. Berikan alasan terhadap cadangan anda. Confirm your recommendation obtained in Q2(b) using the IRR method in evaluating alternatives. Justify your recommendation (6 markah/marks) d) Apakah kelebihan utama menggunakan IRR dalam pemilihan projek? What is the key advantage of using IRR in assessing project selections? (2 markah/marks)

Answer 1

a.Cashflows for the different alternatives
	A	B	C
Initial Investment	-4500	-9000	-18000
Yr. 5 Repeat Investment	-4500	-9000
Yrs. 1-10:
Annual Receipts	1500	3000	5000
Annual Expenses	-150	-300	-1500

Present Worth Analysis
Package A	0	1	2	3	4	5	6	7	8	9	10
Initial Investment	-4500					-4500
Annual Receipts		1500	1500	1500	1500	1500	1500	1500	1500	1500	1500
Annual expenses		-150	-150	-150	-150	-150	-150	-150	-150	-150	-150
Net cash flow	-4500	1350	1350	1350	1350	-3150	1350	1350	1350	1350	1350
PW F at 15% MARR	1	0.86957	0.75614	0.65752	0.57175	0.49718	0.43233	0.37594	0.3269	0.28426	0.24718
PW at 15% MARR	-4500	1173.91	1020.79	887.647	771.87	-1566.11	583.64	507.52	441.32	383.75	333.70
NPW at 15%	38.04
IRR	15.24%

Alternately,
Initial Investment	-4500
PV of Yrs.1-10 Annual Receipts
P/A, 1500,15%,10
1500*5.01877	7528.155
PV of Yrs.1-10 Annual Expenses
P/A, 150,15%,10
150*5.01877	-752.816
Yr. 5 Investment
P/F,4500,15%,Yr. 5
4500*0.49718	-2237.31
NPW of package A	38.03

Package B	0	1	2	3	4	5	6	7	8	9	10
Initial Investment	-9000					-9000
Annual Receipts		3000	3000	3000	3000	3000	3000	3000	3000	3000	3000
Annual expenses		-300	-300	-300	-300	-300	-300	-300	-300	-300	-300
Net cash flow	-9000	2700	2700	2700	2700	-6300	2700	2700	2700	2700	2700
PW F at 15% MARR	1	0.86957	0.75614	0.65752	0.57175	0.49718	0.43233	0.37594	0.3269	0.28426	0.24718
PW at 15% MARR	-9000	2347.83	2041.59	1775.29	1543.73	-3132.21	1167.28	1015.03	882.63	767.51	667.40
NPW at 15%	76.08
IRR	15.24%

Alternately,
Initial Investment	-9000
PV of Yrs.1-10 Annual Receipts
P/A, 3000,15%,10
3000*5.01877	15056.31
PV of Yrs.1-10 Annual Expenses
P/A, 300,15%,10
300*5.01877	-1505.63
Yr. 5 Investment
P/F,9000,15%,Yr. 5
9000*0.49718	-4474.62
NPW of package B	76.06

Package C	0	1	2	3	4	5	6	7	8	9	10
Initial Investment	-18000
Annual Receipts		5000	5000	5000	5000	5000	5000	5000	5000	5000	5000
Annual expenses		-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500
Net cash flow	-18000	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500
PW F at 15% MARR	1	0.86957	0.75614	0.65752	0.57175	0.49718	0.43233	0.37594	0.3269	0.28426	0.24718
PW at 15% MARR	-18000	3043.48	2646.5	2301.31	2001.14	1740.12	1513.15	1315.78	1144.16	994.92	865.15
NPW at 15%	-434.31
IRR	14.36%

Alternately,
Initial Investment	-18000
PV of Yrs.1-10 Annual Receipts
P/A, 5000,15%,10
5000*5.01877	25093.85
PV of Yrs.1-10 Annual Expenses
P/A, 1500,15%,10
1500*5.01877	-7528.16
NPW of package C	-434.31

Summary	NPW	IRR
Package A	38.03	15.24%
Package B	76.06	15.24%
Package C	-434.31	14.36%

Answers:

b.Package B is recommended for its higher NPW

c.Package B returns an IRR of 15.24% which is > the MARR of 15%

d. One main advantage is that it can be compared to the required rate of return ,on the basis of which a project can be selected or rejected .If IRR>MARR,project is selected. If IRR<MARR, then that project is rejected.

It also considers the time value of money--as it is the rate at which the present values of cash inflows & outflows are equal.