Question

1. Project Feasibility Analysis is an important tool to ensure investments in a project has been seriously considered before embarking on the project. a) See the Table Below: Analyze and calculate the Payback Period for the Investment below. (Please show the analysis & calculation) (10 Marks) b) See the Table Below: Analyze and calculate the Average Rate of Return for the Investment below. (Please show the calculation) (5 Marks) Initial Investment: RM300,000.00. Assume a discounted rate of 8% per year. Year Cash Inflow Net Present Value (NPV) Cumulative Present Cumulative Cash Inflow Value 0 -RM300,000.00 -RM300,000.00 RM60,000.00 RM55,555.56 2 RM70,000.00 RM60,013.72 3 RM80,000.00 RM63,506.58 1 4 RM80,000.00 RM58,802.39 5 RM80,000.00 RM80,000.00 RM54,446.66 RM50,413.57 6 Total c) The management has decided to invest ONLY if the Payback period is less than 4 years. From your analysis and calculation, will the Management invest in this project and why? (5 marks)

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   an example

Answer 1

ANSWER (a):

Year	Cash Inflow	Net Present Value (NPV)	Cumulative Present Value	Cumulative Cash Inflow
0	-RM 300,000.00	-RM 300,000.00	-RM 300,000.00
1	RM 60,000.00	RM 55,555.56	RM 55,555.56	RM 60,000.00
2	RM 70,000.00	RM 60,013.72	RM 115,569.28	RM 130,000.00
3	RM 80,000.00	RM 63,506.58	RM 179,075.86	RM 210,000.00
4	RM 80,000.00	RM 58,802.39	RM 237,878.25	RM 290,000.00
5	RM 80,000.00	RM 54,446.66	RM 292,324.91	RM 370,000.00
6	RM 80,000.00	RM 50,413.57	RM 342,738.48	RM 450,000.00
Total	RM 450,000.00	RM 342,738.48

Payback Period = Year where Cumulative Cash Inflow is Nearest to Payback

+

(Investment - Cumulative Cash Inflow Nearest to Payback) / Cash flow at End of Next Year

= 4 + (300,000 - 290,000) / 80,000

= 4 + 10,000 / 80,000

= 4 + 0.125

= 4.125 years

Thus, the payback period is 4.125 years.

Working Note:

1. The cumulative cash flow nearest to the investment is 290,000 which lies in the fourth year and it has been highlighted with green color.

2. The cash flow at the end of next year, i.e., at the end of the fifth year is 80,000. It is highlighted by yellow color.

ANSWER (b):

Average Rate of Return = 80,000 / 300,000

= 26.67%

Thus, the average rate of return is 26.67%.

ANSWER (c):

The management will not invest in this project because they had decided to invest only if the payback period is less than 4 years. Here, it is 4.125 years which is more than 4 years. Thus, the investment will not be made. A longer payback period is unattractive because the amount invested in the project would be gained after a longer period.