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Cannelloni Berhad intends to purchase an equipment worth RM500,000. The new equipment will have a 5-year useful life and will be depreciated to zero
Cannelloni Berhad intends to purchase an equipment worth RM500,000. The new equipment will have a 5-year useful life and will be depreciated to zero using the straight-line method. An import duty of RM50,000 must be paid as the equipment is imported from Korea, on top of RM15,000 for shipping and RM5,000 for installation. The new equipment requires inventories of raw material to increase by RM20,000. Accounts payable is also expected to increase by RM8,000. The net operating working capital is expected to be recaptured at the end of the project. The equipment is expected to generate new sales of RM120,000 per year and is expected to save RM25,000 in labor and electrical expenses over the next 5-years. At the end of its useful life, the equipment is expected to have a disposal value of RM80,000. Cannelloni's marginal tax rate is 28 percent and has a required rate of return of 8 percent. Required: a) Calculate the initial cash outflow to purchase the new equipment. (2 Marks) b) Calculate the project's net present value and comment on the acceptability of the project. (8 Marks)
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