Question

QUESTION 1: (20 marks) 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 Cash Inflow Cumulative Present Value 0 1 2 3 -RM300,000.00 RM60,000.00 RM70,000.00 RM80,000.00 RM80,000.00 RM80,000.00 RM80,000.00 -RM300,000.00 RM55,555.56 RM60,013.72 RM63,506.58 RM58,802.39 RM54,446.66 RM50,413.57 4 5 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)

Answer 1

a)

The payback period may be computed based on discounted cash flow (the fourth column) or based on non-discounted cash flow (the last column). We prefer the first method and use it as follows:

Year	Cash inflow	NPV	Cumulative PV	Cumulative cash inflow
0	-300,000	-300,000.00	-300,000.00	-300,000
1	60,000	55,555.56	-244,444.44	-240,000
2	70,000	60,013.72	-184,430.73	-170,000
3	80,000	63,506.58	-120,924.15	-90,000
4	80,000	58,802.39	-62,121.76	-10,000
5	80,000	54,446.66	-7,675.10	70,000
6	80,000	50,413.57	42,738.47	150,000

As it is seen from the table, the cumulative PV enters from negative to positive in the sixth year. So, the payback period (based on the discounted cash flow method) happens to be in the sixth year.

More precisely, assuming linear cash flows within a year:

The payback period = 5 + (0 - (-7675.10)) / (42738.47 - (-7675.10)) = 5.152 years

(b)

Average rate of return = 42738.47 / 300000 = 14.2%

(c)

The payback period is more than 4 years. So, the investment may not be done.