A manufacturer intends to purchase a new production machine costing RM700,000 (price inclusive of freight), requires RM10,000 installation cost, and RM40,000 training costs. Total annual running and maintenance cost amounted to RM120,000, and annual revenue generated is expected to be RM320,000. Additional working capital of RM10,000 is required at the start of the project, and fully recovered at the end of its 5 year useful life.The company has an effective tax rate of 20% and cost of capital of 10% per annum.

Required:

a) By discounting the future after-tax cash flows, calculate the net present value (NPV) of the project.

(Refer to NPV tables for the discount factors.)

b) Should the production machine be purchased?

c) State all your assumptions.