Reference no: EM133014989
Question - Saujana Sdn Bhd is a construction company incorporated on 1 July 2014, the business is located in Subang Jaya, Selangor. Due to the COVID-19 pandemic, the company is facing financial constraints, the company Chief Executive, Ms. Su Ann needs 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, Ms. Su Ann is considering three proposals for the construction of new loading facilities. As the management accountant of the company, Mr. Adi is responsible to prepare the capital budgeting analysis, interpret the results and advise the Chief Executive on how the information can be used in the decision-making process to evaluate each proposal of the new loading facilities. Saujana's required rate of return is 14%. The information about the three proposals has been obtained:
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Proposal 1
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Proposal 2
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Proposal 3
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Net initial investment
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RM3,000,000
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RM2,500,000
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RM3,000,000
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Projected cash inflows:
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Year 1
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RM1,500,000
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RM900,000
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RM1,000,000
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Year 2
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RM1,500,000
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RM800,000
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RM1,000,000
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Year 3
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RM900,000
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RM600,000
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RM1,000,000
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Year 4
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RM1100,000
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RM400,000
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RM1,000,000
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Year 5
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RM1,000,000
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Required -
a) Calculate the following methods for each proposal: i) Net present value ii) Payback period iii) Internal rate of return.
b) Based on analysis in (a), ranked the proposals and interpret the outcomes for each method.
c) Recommend which proposal (if any) should the Chief Executive consider and highlight what are the factors should the company take into consideration in deciding the best proposal.