1. The calculated capital budgeting techniques yielded the following results:
A. Accounting Rate of Return (AROR) is <u>28%</u>.
B. Payback Period Technique (PBP) is <u>5 years</u>.
C. Net Present Value Technique (NPV) is <u>RM33,588</u>.
D. Profitability Index (PI) is <u>1.056</u>.
2. The project should be accepted based on the positive results above.
3. The importance of capital budgeting techniques lies in the fact that they aid capital decision-making by measuring their probable outcomes.
<h3>What are capital budgeting techniques?</h3>
Capital budgeting techniques are capital investment evaluation tools.
Some of the capital budget tools include the Payback Period, Discounted Payment Period, Net Present Value, Profitability Index, Internal Rate of Return, and Modified Internal Rate of Return.
These capital budgeting techniques help management to evaluate capital projects and to choose investment strategies.
<h3>Data and Calculations:</h3>
Investment cost = RM600,000
Cost of capital = 12%
Net Cash Flows PV Factor Present Value
Year 0 RM600,000 1 (RM600,000)
Year 1 RM100,000 0.893 89,300
Year 2 110,000 0.797 87,670
Year 3 121,000 0.712 86,152
Year 4 133,100 0.636 84,652
Year 5 146,410 0.567 83,014
Year 6 RM400,000 0.507 202,800
Present value of cash flows = RM633,588
Net Present Value RM33,588
Total Net Cash Flows = RM1,010,510
Average Net Cash flows = RM168,418 (RM1,010,510/6)
Accounting Rate of Return = Average Income/Initial Cost
= 28% (RM168,418/RM600,000 x 100)
Payback period = 5 years
NPV = Initial Investment - PV of net cash flows
= RM33,588
Profitability Index = Present value of cash flows/Initial Cost
= 1.056 (RM633,588/RM600,000)
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