Batal Baseem Baf (BBB) is considering to introduce one new product in the market. The Chief Financial Officer of BBB has gathered the following information for assessing the proposed project.

• The new product is expected to be sold in the market for five years. The production then will be terminated after five years.

• BBB needs to buy a new machine at a purchase price of RM700,000 in order to produce the product.

• The installation cost of the machine is RM40,000.

• The maintenance cost of the machine is RM40,000 per annum.

• The new machine will be depreciated using a straight line method.

• The machine will be sold for RM100,000 after five years of its useful life.

• BBB will also spend about RM40,000 for promotional activities of the

  product in year 1.

• At the early stage, BBB needs an increase in net working capital of

  RM38,000. This investment in net working capital is assumed to be fully

  recovered in the fifth year.

• The new product is expected to generate cash sales as follows:

First year Second year Third year Fourth year Fifth year

RM300,000 RM350,000 RM400,000 RM450,000

RM450,000

Currently, BBBs total assets is RM100 million in which 65% is financed by equity. BBB had never issued preferred shares. BBBs cost of equity is 15% while before tax cost of debt is 7%. Therefore, the weighted average cost of capital (WACC) is 12%. BBB is considering to raise the required capital expenditure of this project through a mix equity and debt financing and would like to maintain the current capital structure. The current cost of equity and before tax cost of debt are expected to remain following the additional fund raise to finance this new project. BBBs corporate tax is 28%.

1. a) Should BBB make a decision to accept or reject this proposed project of this new product based on NPV and IRR evaluation methods? Show your calculation.

2. b) Show an illustration of the sensitivity analysis and scenario analysis respectively for this project. ( You may use your own assumptions on the probability e.g. sales increase by 10 % and sales decrease by 10%)