ICB Berhad is looking for projects in the Klang Development Region for additional investments. Two mutually exclusive projects are brought to the attention of the management and the detailed information furnished below: Project A 200,000 Project B 180,000 Cost of equipment (RM) Estimated life 6 уears 5 years Scrap value at life end (RM) 20,000 NIL Additional information: Revenue for Project A in the first year is estimated to be RM80,000 and is expected to increase by 10% each year. 1. 2. The annual fixed cost for project A is RM10,500 and project B is RM9,000. 3. Variable costs for each year are expected to be 20% of revenue. 4. The equipment is eligible for 20% initial and 10% annual capital allowance. The current tax rate is 30% and the tax is payable at the end of the following year. The company's cost of capital is 11%. 5. The management accountant calculated the Net Present Value for project B as RM58,501. 6. The present value and Present Value Annuity of RM1 discounted at 11% were as follows: Year Present Value Present Value Annuity 1 0.9009 0.9009 0.8116 1.7125 0.7312 2.4437 4 0.6587 3.1024 0.5935 3.6959 0.5346 4.2305 7 0.4817 4.7122 Required: Calculate the NPV for Project A and recommend the project that ICB Berhad should select for investment in the Klang Development Region. a. b. Evaluate the above two projects using equivalent annual value method.
ICB Berhad is looking for projects in the Klang Development Region for additional investments. Two mutually exclusive projects are brought to the attention of the management and the detailed information furnished below: Project A 200,000 Project B 180,000 Cost of equipment (RM) Estimated life 6 уears 5 years Scrap value at life end (RM) 20,000 NIL Additional information: Revenue for Project A in the first year is estimated to be RM80,000 and is expected to increase by 10% each year. 1. 2. The annual fixed cost for project A is RM10,500 and project B is RM9,000. 3. Variable costs for each year are expected to be 20% of revenue. 4. The equipment is eligible for 20% initial and 10% annual capital allowance. The current tax rate is 30% and the tax is payable at the end of the following year. The company's cost of capital is 11%. 5. The management accountant calculated the Net Present Value for project B as RM58,501. 6. The present value and Present Value Annuity of RM1 discounted at 11% were as follows: Year Present Value Present Value Annuity 1 0.9009 0.9009 0.8116 1.7125 0.7312 2.4437 4 0.6587 3.1024 0.5935 3.6959 0.5346 4.2305 7 0.4817 4.7122 Required: Calculate the NPV for Project A and recommend the project that ICB Berhad should select for investment in the Klang Development Region. a. b. Evaluate the above two projects using equivalent annual value method.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 15P
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Transcribed Image Text:ICB Berhad is looking for projects in the Klang Development Region for additional
investments. Two mutually exclusive projects are brought to the attention of the management
and the detailed information furnished below:
Project A
200,000
Project B
180,000
Cost of equipment (RM)
Estimated life
6 years
5 years
Scrap value at life end (RM)
20,000
NIL
Additional information:
Revenue for Project A in the first year is estimated to be RM80,000 and is expected
to increase by 10% each year.
1.
2.
The annual fixed cost for project A is RM10,500 and project B is RM9,000.
3.
Variable costs for each year are expected to be 20% of revenue.
4.
The equipment is eligible for 20% initial and 10% annual capital allowance.
The current tax rate is 30% and the tax is payable at the end of the following year.
The company's cost of capital is 11%.
5.
The management accountant calculated the Net Present Value for project B as
RM58,501.
6.
The present value and Present Value Annuity of RM1 discounted at 11% were as follows:
Year
Present Value
Present Value Annuity
1
0.9009
0.9009
2
0.8116
1.7125
0.7312
2.4437
4
0.6587
3.1024
0.5935
3.6959
0.5346
4.2305
7
0.4817
4.7122
Required:
Calculate the NPV for Project A and recommend the project that ICB Berhad should
select for investment in the Klang Development Region.
a.
b.
Evaluate the above two projects using equivalent annual value method.
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