Question

2/3 QUESTION 2 (15 marks) BB Sdn Bhd is a construction company located in Bangi, Selangor, incorporated on 1 November 2015. Due to the COVID-19 outbreak, the company faced financial problems that made the company's Chief Executive, Mr. Samad to figure out how and when to best allocate the firm's financial resources among alternative opportunities to create future value for the company. Currently, Mr. Samad is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis, the company's management accountant, Ms. Chung has developed the following information about the four proposals: Proposal 1. Proposal 2 Proposal 3 Proposal 4 Payback period 4 years 4.5 years 6 years 7 years Net present value RM90,000 RM170,000 RM160,000 RM300,000 Internal rate of return 12% 14% 11% 13% Accrual accounting rate of return 8% 6% 4% 7% Required: As a management accountant of the company, advise the Chief Executive on how the information above can be used in the decision-making process for each proposal of the new loading facilities (15 marks)

Answer 1

1. Net Present Value (NPV)
NPV is the present value of all future inflows less present value of cash outflow. Project having higher net present value is prefered.
So, we will rank all the proposal having higher npv:
Rank1- Proposal 4
Rank2- Proposal 2
Rank3- Proposal 3
Rank4- Proposal 1
Therefore, proposal 4 having highest value should be chosen according to NPV.

2. Payback period
It is the tim within which we will recover the initial cash outflows. Project having lowest payback period is prefered.
So, we will rank all the proposal having low payback period:
Rank1- Proposal 1
Rank2- Proposal 2
Rank3- Proposal 3
Rank4- Proposal 4
Therefore, proposal 1 having lowest payback period should be chosen according to payback period.

3. Internal rate of return
IRR is the rate at which the present values of future cash inflows equals the cash outflows. project having highest IRR is prefered.
so, we will rank all the proposal having higher IRR:
Rank1- Proposal 2
Rank2- Proposal 4
Rank3- Proposal 1
Rank4- Proposal 3
Therefore, proposal 2 having highest IRR should be chosen according to IRR.

4. Accrual accounting rate of return
It is calculated by dividing Averege anual investment income by average annual investment. Project having highest accrual accounting rate of return is prefered.
so, we will rank all the proposal having higher Accrual rate of return:
Rank1- Proposal 1
Rank2- Proposal 4
Rank3- Proposal 2
Rank4- Proposal 3
Therefore, proposal 4 having highest rate should be chosen according to accrual accounting rate of return.

CONCLUSION:
After analysing the above ranks, we can see that propsal 4,2,1 are highlighted.
We can see tha proposal 2 and proposal 1 have quite small difference of 0.5 years in payback period but Proposal 2 have higher IRR and NPV so therefore, proposal 1 should be rejectd.
Now we have Proposal 2 and 4. According to me choosing proposal 4 is more benficial because Proposal 4 is having higher NPV than proposal 4. But the Proposal 2 better in IRR and Payback period.
There is only 1% difference is IRR between the two Therefore, we can ignore IRR total and still choose proposal 4.
But Proposal 2 is better than proposal 4 in terms of payback period. Payback period cannot decied the risk of future cash flows. If the company is in hurry to get returns from the investment then, proposal @ should be chosen.Otherwise, accourding to me, it is better to choose Proposal 4 having highest NPV and accual accounting rate of return than all the proposal.