294 Financial Management for Beginners Question 5 Sunny Sdn Bhd is considering to diversify into a new product line. To diversify, the company needs to purchase a new machine that will cost RM620,000. In addition, it will require RM18,000 for installation and RM12,000 for transportation. The asset will be depreciated using the straight-line method over its useful life of 10 years, with zero salvage value. 62 0 To finance the purchase of the new machine, the company will have to borrow RM400,000 at 8% interest per annum from a local bank. A total of RM32,000 a year will be paid for this purpose. The new machine is expected to increase company sales by RM150,000 per year for the first five years and an additional RM50,000 for the remainder of its life. The use of this machine will also require the company to increase investment in inventories by RM20,000. It is expected that labor costs will be reduced by RM40,000 per year. However, maintenance costs will increase by RM8,000 per annum. The company's fixed cost will remain at RM75,000 each year. The corporate tax rate is 25% and the firm's cost of capital is 15%. Required: (a) Determine the following: (i) initial outlay (ii) annual differential cash flows (iii) terminal cash flows (b) Determine the project's (i) payback period. (ii) NPV. (iii) IRR. (c) Would you accept the project? Explain