CAPITAL BUDGETING _EXERCISE JUN 2018

CUMI CUMI WATER

Cumi cumi Water is analyzing 2 mutually exclusive project : A and B. Initial cost to invest in each projects
is RM10,000. Cost of capital is 12%.

Determine : Payback period, NPV, Profitability Index.

Which project should the company choose based on the each capital budgeting method. Below are the
projected after tax cash flows.

YEAR PROJECT A PROJECT B

0 10,000 10,000
1 6500 3500

2 3000 3500
3 3000 3500

4 1000 3500
PAYBACK PERIOD PROJECT A

YEAR PROJECT A CUMULATIVE

CASH FLOWS

0 10,000
1 6500 6500

2 3000 6500+3000= 9500

3 3000 9500+3000 =
12500

4 1000 12500+ 100 =

13500
PP = 2 YEARS + ( 10000 – 9500 ) / (12500 – 9500) = 2 YEARS + 0.1667 = 2.17 YEARS

2.17 YEARS = 2 YEARS + (0.17 X12) = 2 YEARS 2 MONTH

PP B = Cost / cash flows = 10,000 / 3500 = 2. 86 years.

Based on PP, choose project A .

NPV
 YEAR PROJECT A COST OF CAPITAL 12% CASH FLOWS

0 10,000
1 6500 0.8929 6500 X 0.8929=

2 3000 0.7972 3000 X 0.7972 =

3 3000 0.7118 3000 X 0.7118 =

4 1000 0.6355 1000 X 0.6355=

TOTAL PV RM10,996.35
- COST 10000
- NPV RM996.35

NPV B = Cash flows ( PV Annuity Table : 12% , 4)

= 3500 ( 3.0373) – 10,000 = 10.630.55 – 10,000 = RM 630.55

Project A , NPV is higher than project b

Profitability Index A: Total pv / cost = 10,996.35 /10,000 = 1.1

Profitability index B : 10,630.55 /10,000 = 1.06

Based on PI = choose Project A.

NET PRESENT VALUE PROJECT A

YEAR PROJECT A PRESENT VALUE FACTOR @12% PV CASH FLOWS

0 (10,000) 0
1 6500 0.8929 x 6500

2 3000 0.7972 x 3000

3 3000 0.7118 x 3000

4 1000 0.6355 x1000

TOTAL PV

- INITIAL COST
NPV