COURSE : CORPORATE FINANCIAL MANAGEMENT II CORPORATE FINANCE PRINCIPLES. COURSE CODE : FIN402

QUESTION 3

Liam, Nelson & Co is newly established electrical appliances company based in Cheras. The company is considering investing in a new high technology machine imported from Australia amounted to RM450,000 with RM54,300 of freight cost.

Apart from that, the company also need to pay an additional of RM61,040 for the installation and modification cost. Consistent with current practices, it is estimated that the new high technology machine will be depreciated using straight line method over its useful life of 10 years with RM76,000 scrap value.

The new high technology machine is expected to increase the companys sales by RM110,000 per year. The use of the new high technology machine will also require the company to increase the investment in the inventories by RM35,670. The company also has to increase direct operating expenses by RM15,000 and upkeep costs by RM5,000 annually. The down payment of 33% already paid on September last year.

In order for the new machine to operate properly, company need to send a few workers for training and this will be amounted to RM23,555 in cost. The cost of capital is 9% and corporation tax rate is 27%.

Required:

a. Based on the information given on the planned acquisition of the new technology machine, calculate the followings

vi. Internal rate of return.