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a) A financial manager is considering a new project. The project will require RM250,000 for new fixed assets, RMI20,000 for additional inventory and RM25,000 for additional accounts receivable. Short-term debt is expected to increase by RM60,000 and long-term debt is expected to increase by RMI80,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 15 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of RM380,000 and costs of RM280,000. The tax rate is 34 percent and the required rate of return is 12 percent.

i) What is the initial cost of this project? ii) Determine the annual cash flow of this project in years l- 4.

iii) What is the terminal value at year 5?

iv) Should this project be accepted or rejected? Justify your decision.

b) What are the advantages of the net present value (NPV) and internal rate of return (IRR) techniques compared to other capital budgeting techniques? NPV and IRR generally give the same decision rule in evaluating capital investments, but why is NPV the superior capital budgeting technique compared to IRR?

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