A firm is considering an investment project that requires an initial outlay of RM10,000,000. The...
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Finance
A firm is considering an investment project that requires an initial outlay of RM10,000,000. The project is expected to provide net cash flows of RM6,500,000 in year 1, RM3,000,000 in year 2, RM3,000,000 in year 3 and RM1,000,000 in year 4.
(a)What is the net present value (NPV) for the project if its cost of capital is 15%? What does the NPV value represent with respect to the firms shareholders?
(b)What is the profitability index (PI) for the project? What is the relationship between the PI and the NPV?
(c)Evidence suggests that in spite of the theoretical superiority of NPV, financial managers use the internal rate of return (IRR) approach just as often as the NPV method. Discuss the above statement.
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