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    Assignment On Capital Budgeting - Answers

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    Hasnita Hasan Budin
    The crossover rate between the two projects is 21.3219%. Project

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    Assignment On Capital Budgeting - Answers

    Uploaded by

    Hasnita Hasan Budin
    29 views3 pages
    The crossover rate between the two projects is 21.3219%. Project

    Original Description:

    FIN430

    Original Title

    ASSIGNMENT ON CAPITAL BUDGETING - ANSWERS

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    The crossover rate between the two projects is 21.3219%. Project

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    29 views3 pages

    Assignment On Capital Budgeting - Answers

    Uploaded by

    Hasnita Hasan Budin
    The crossover rate between the two projects is 21.3219%. Project

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    FIN 430: INTRODUCTION TO CORPORATE FINANCE

    CHAPTER: CAPITAL BUDGETING

    Costa Ltd has two mutually exclusive projects under consideration. The initial investment for Project
    A is RM300,000 and Project B is RM320,000 and the required return on each is 14.5%. The estimated
    cash flows are as follows:

    Year Project A Project B


    1 0 90,000
    2 0 90,000
    3 180,000 90,000
    4 140,000 90,000
    5 200,000 90,000

    i) Calculate the payback period, Net Present Value, Internal Rate of Return and
    profitability index for both projects.

    ii) Which project would you finally choose? Why?

    iii) Calculate the cross over rate of the projects. Over what range of cost of capital would
    you choose Project A and Project B?
    (30 marks)

    i) Project A Project B
    Payback period: Payback period:

    CF (RM) Acc. CF(RM)


    Yr 1 0 0 Payback period = initial outlay
    2 0 0 3+ Annual cash flows
    3 180,000 180,000 = 320,000
    4 140,000 need 120,000 = 0.85 90,000
    140,000 = 3.55 yrs

    Payback period = 3 + 0.85 = 3.85 yrs

    Net Present Value and IRR: Net Present Value and IRR:

    CF CFO 300,000 +/- ENTER CF CFO 320,000 +/- ENTER


    CO1 0 ENTER CO1 90,000 ENTER
    FO1 1 ENTER FO1 5 ENTER
    CO2 0 ENTER NPV 14.5 ENTER
    FO2 1 ENTER CPT
    CO3 180,000 ENTER (14,699.73)
    FO3 1 ENTER
    CO4 140,000 ENTER 2nd IRR CPT
    FO4 1 ENTER 12.55%
    CO5 200,000 ENTER
    FO5 1 ENTER
    NPV 14.5 ENTER
    CPT
    2,988.46

    2nd IRR CPT


    14.79%

    Profitability Index: Profitability Index:

    PI = Total PV PI = Total PV
    Initial outlay Initial outlay
    = 2,988.46 + 300,000 = (14,699.73) + 320,000
    300,000 320,000
    = 1.0100 = 0.9541

    ii) Project A will be chosen because it gives a


    positive NPV

    iii) Calculate the crossover rate:

    Step 1 : Find the difference of the projects’ cash flows

    Project A Project B Difference


    Year 0 (300,000) - (320,000) 20,000
    Year 1 0 - 90,000 (90,000)
    Year 2 0 - 90,000 (90,000)
    Year 3 180,000 - 90,000 90,000
    Year 4 140,000 - 90,000 50,000
    Year 5 200,000 - 90,000 110,000

    Step 2 : Calculate the rate

    CF CFO 20,000 ENTER


    CO1 90,000 +/- ENTER
    FO1 1 ENTER
    CO2 90,000 +/- ENTER
    FO2 1 ENTER
    CO3 90,000 ENTER
    FO3 1 ENTER
    CO4 50,000 ENTER
    FO4 1 ENTER
    CO5 110,000 ENTER
    FO5 1 ENTER
    nd
    2 IRR CPT
    21.3219%

    Over what range of cost of capital would you choose Project A and Project B?

    Project A Project B
    Net Present Value: Net Present Value:
    CF CFO 300,000 +/- ENTER CF CFO 320,000 +/- ENTER
    CO1 0 ENTER CO1 90,000 ENTER
    FO1 1 ENTER FO1 5 ENTER
    CO2 0 ENTER NPV 30 ENTER
    FO2 1 ENTER CPT
    CO3 180,000 ENTER (100,798.72)
    FO3 1 ENTER
    CO4 140,000 ENTER
    FO4 1 ENTER
    CO5 200,000 ENTER
    FO5 1 ENTER
    NPV 30 ENTER
    CPT
    (115,186.38)

    Net Present Value: Net Present Value:

    CF CFO 300,000 +/- ENTER CF CFO 320,000 +/- ENTER


    CO1 0 ENTER CO1 90,000 ENTER
    FO1 1 ENTER FO1 5 ENTER
    CO2 0 ENTER NPV 10 ENTER
    FO2 1 ENTER CPT
    CO3 180,000 ENTER 21,170.80
    FO3 1 ENTER
    CO4 140,000 ENTER
    FO4 1 ENTER
    CO5 200,000 ENTER
    FO5 1 ENTER
    NPV 10 ENTER
    CPT
    55,042.81

    Any rate lower than the cross over rate, Project A should be chosen. Meanwhile, any rate higher
    than the cross over rate, Project B should be chosen

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