Question 1 Molek Berhad is considering the purchase of a new machine. It costs RM200,000 and requires installation costs of RM20,000. The new machine is estimated to have an ex- pected useful life of five years with a salvage value of
RM10,000 and will be depreciated using the straight-line method.
The old printing machine has zero terminal book value and
five years remaining useful life. It is being depreciated using
the straight-line method. It was purchased five years ago for
RM100,000 and can be sold today for RM40,000,
To buy the new machine, Molek Berhad plans to take a long- term loan of RM120,000 and 10% interest will be paid annually. The balance will be finance by retained earnings.
With the use of the new machine, annual sales are expected to increase by RM100,000 and expenses (excluding depreciation) will represent 40% of sales. This new machine will require an increase of RM10,000 in inventories. Molek Berhad
needs a larger space to store these inventories, and hence a
small room that is currently being rented out for RM12,000 per annum will be converted into a store room. Two staff were sent for training last month and the firm has paid RM5,000 training fee.
The firm is subject to a 25% tax rate, and its cost of capital is 12%. The desired payback period is four years.
Required:
a) Calculate the following after-tax cash flows attributable
to the new printing machine:
i) Initial Outlay
ii) Differential cash flows over the project's life
iii) Terminal cash flows
b) Compute the following for new machine:
i) Payback period
ii) Net present value
iii) Internal rate of return
iv) Profitability index
c) Make a recommendation to accept or reject the new