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The Malaysian Baker Sdn Bhd is planning to purchase a new high-technology, heavy- duty bakery machine for its new Kuala Selangor facility in the coming year. The capital expenditure budget is limited to RM2,500,000.00 for the year. Aaron Rayyan Malique, the accountant is analyzing the following capital expenditure proposals for the consideration of the companys owner, Harith Rezeque Melimpah:

	Proposal A	Proposal B	Proposal C
Projected cash outflow	RM	RM	RM
Net initial investment	1,500,000.00	750,000.00	2,000,000.00
Projected cash inflow
Year 1	500,000.00	200,000.00	1,000,000.00
Year 2	500,000.00	450,000.00	1,000,000.00
Year 3	500,000.00	400,000.00	100,000.00
Year 4	500,000.00		50,000.00
Required rate of return	10%	10%	10%

Due largely to the limitation concerning the availability of resources in the company, Harith is in the view that the payback method should be employed to choose between the capital expenditure proposals. Aaron, on the other hand, thinks that the proposals should be selected based on their net present values (NPVs).

REQUIRED:

1. Define the payback method and explain the advantages and drawbacks of employing the method to choose between the proposals.

2. Compute the payback period for each of the three proposals.

3. Based on (ii), which proposal should Harith choose? Explain your answer.

4. Assuming that all cash flows occur at the end of the year (except initial investment), compute the NPV for each proposal.

5. Based on (iv), which proposal would you recommend funding? Explain your answer.

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