b) PKP Sdn. Bhd. must choose between two machines, X and Y. The purchasing costs today and maintenance expenses at the end of every year for these two machines are given as follows:

Year

Machine X

Machine Y

0

1

2

3

4

5

-RM2,000,000

-RM200,000

-RM200,000

-RM200,000

-

-

-RM2,500,000

-RM210,000

-RM210,000

-RM210,000

-RM210,000

-RM210,000

All cash flows occur at year-end and the discount rate is 12%. Assume that revenues are the same regardless of the machine, and assume that whichever machine the company chooses, it will continue to buy that model forever. Which machine should the company choose? Tax rate is 24% and simplified straight line is used as the method of depreciation.

(2.5 marks)

c)Explain why net operating working capital is included in a capital budgeting analysis

and how it is recovered at the end of a project's life.

(1 mark)