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Question 1
Stargate Corporation is considering two projects of machinery that perform the same task. The required rate of return for these projects is RM10%. The projects’ expected cash flows are as follows:

Year Machine MIR (RM) Machine ZA (RM)
0 (17,000) (17,000)
1 8,000 2,000
2 7,000 5,000
3 5,000 9,000
4 3,000 9,500

Based on the above information, you are required to make an analysis for the decision of Capital Budgeting based on the following techniques:

(a) Net Present Value, NPV
(b) Profitability Index, PI

Respuesta :

NPV = Initial cash outlay + PV of all the cash inflows.

PV of cash flow at time n = Cash flow at time n/ ((1+r)^n).

NPV = - CF0 + (CF1/((1+WACC)^1)) + (CF2/((1+WACC)^2)) + (CF3/((1+WACC)^3)) +  (CFn/((1+WACC)^n)).

Profitability Index (PI)=

1 + (NPV/Initial Investment).

 Machine MIR (RM)         Machine ZA (RM)

Years Total Cash flows PV Total Cash flows PV

0                      (17,000)          (17,000.00)                 (17,000)                 (17,000.00)

1                          8,000              7,272.73                     2,000                     1,818.18

2                          7,000              5,785.12                     5,000                     4,132.23

3                          5,000              3,756.57                     9,000                     6,761.83

4                          3,000              2,049.04                     9,500                     6,488.63

Required return 10.00% 10.00%  

 NPV                1,863.5 NPV                      2,200.9

 PI                     1.11 PI                            1.13

The most important feature of the net present value method is that it is based on the idea that future dollars will be less valuable today than bank dollars. Future cash flows are discounted to date to determine their value.

Learn more about Net Present Value here: https://brainly.com/question/13228231

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