Question
Canvas Industry Berhad projects unit sales for a new headset as follows: Year: 1 2 3 Unit sales: 73000 86000 105000 Production of the headsets
Canvas Industry Berhad projects unit sales for a new headset as follows:
Year: 1 2 3
Unit sales: 73000 86000 105000
Production of the headsets will require RM2 million in net working capital to start. Total fixed costs are RM1 million per year, variable production costs are RM200 per unit, and the units are priced at RM300 each. The equipment needed to begin the production has an installed cost of RM30 million. Because of the headsets are intended for professional singers, the equipment is considered industrial machinery and it will be depreciated using the straight-line method over 3 years. In Year 3, this equipment can be sold for 20 percent of its acquisition cost. The tax rate is 25 percent, and the required return is 15 percent.
(i) Compute the net cash flows for this project for Year 0 to Year 3. (24 marks)
(ii) Calculate the net present value for this project. (5 marks)
(iii) Should Canvas Industry Berhad invest in this project? Why? (2 marks)
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