Case 5

SuriaSdnBhdis consideringpurchasing a new machine with cost RM450,000. It is expected tohave a useful life of 5 years. At the end of the useful life, the machine is expected tohave a salvage value of RM 10,000. The company's policy isto provide annual depreciationbased on straight line method.

The forecasted sales from the project is as follows:

Year 1 - 3 Increase by RM100,000

Year 4 - 5 Increase by RM180,000

Besides that, the machine will also incur the following projected differential cash flows:

Electricity chargesIncrease by RM60,000 from year1untilyear 5

SalariesDecrease by RM30,000 from year1untilyear 5

Manufacturing costDecrease by RM 50,000 from year 1until year 3

Decrease by RM80,000 from year 4 until year 5

The company's tax rate is 25% and the company's cost of capital is 12%.The desired payback period is three years andminimum requiredaccounting rate of return is 20%.Below are given present value interest factor table:

Period

6%

12%

20%

1

0.9434

0.8929

0.8333

2

0.8900

0.7972

0.6944

3

0.8396

0.7118

0.5787

4

0.7921

0.6355

0.4823

5

0.7473

0.5674

0.4019

Required:

Evaluate the investment proposal using various capital investment techniques and briefly explain whether the firm/company should accept or reject the investment proposal.