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6. ABC Berhad is currently using a moulding machine that was purchased five years ago with a remaining useful life of five years. The company

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6. ABC Berhad is currently using a moulding machine that was purchased five years ago with a remaining useful life of five years. The company is analyzing a proposal by the production department to replace the machine. The new machine can be purchased at RM500,000 and will have a 5-year useful life. If the machine is used till the end of its useful life, it can be sold at RM50,000. However, the company needs to pay another RM25,000 to modify the machine for its special function. The existing machine was bought for RM300,000 with an expected salvage value of RM30,000. However, if the company decides to sell the machine now, it can be sold at RM120,000. Since the new machine is more efficient, it would require additional raw materials of RM20,000 and accruals are expected to increase by RM15,000. Sales is expected to increase by RM150,000 per year. However, production costs will also go up by RM60,000 every year. The cost of defects can be reduced by RM10,000 per annum and the company can also reduce the number of production workers. Hence, labor cost is expected to be reduced by RM75,000 per year. The following are the cash flows for this new machine: Initial outlay RM397,400 Annual after-tax cash flows RM145,040 Terminal cash flows RM 55,000 It is policy of the company to use straight-line method to depreciate all its fixed assets. The corporate tax rate is 28%. The new machine has a 5-year expected useful life. ABC Berhad requires a minimum rate of return of 15%. The firm's maximum payback period is three years. Based on the above information, you are required to calculate: (a) The payback period of the project. (b) Explain the reasons why the payback method is popular among managers and often used as the primary decision technique. (c) The net present value of the project. (d) Should ABC Berhad buy the new machine? Why

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