Advance Fiber Berhad is a listed company on Bursa Malaysia. The company was founded in 2000, when several scientists and engineers began to see that optical fiber for the telecommunications industry had become a cheap commodity at a large fiber-optic-cable company. They decided to start their own business, which would specialize in cutting-edge research applications in life sciences and medical devices. Advance Fiber Berhad is now one of the leading firms in its niche field. Advance Fibers management attributes the firms success to its ability to stay one step ahead of the markets fast-changing technological needs. Almost as important is Advance Fibers ability to select high-value-added projects and avoid commercial disasters.

Your first assignment in your new position as assistant financial analyst at Advance Fiber is to evaluate two new capital budgeting proposal which are the Quick Test Tube project and the Fast Connected Kit project. Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a basic question aimed at judging your understanding of the capital budgeting process such as payback period, net present value and internal rate of return. Advance Fiber uses net present value as its primary decision criterion, but company executives believe that the other statistics provide some useful additional perspectives. To explain Advance Fibers capital budgeting techniques, you have decided to present the cash flows from both proposals. All figures are in millions of Ringgit Malaysia (RM million). The corporate discount rate is 12%.

Time of Cash Flow

Investment Year 1 Year 2 Year 3 Year 4 Year 5 (RM million) (RM million) (RM million) (RM million) (RM million) (RM million)

Quick Test Tube 220 40 60 80 100 140 Fast Connected Kit 220 80 80 80 80 80

i. Based on the above case, determine the payback period for each project. (2 marks) ii. Compute the net present value (NPV) for each project. (3 marks)

iii. Calculate the internal rate of return (IRR) for each project (4 marks)

iv. The company evaluates all projects by applying the IRR rule. Explain which project the company should accept. (1 mark)