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Digital Capture Enterprise is considering automating its printing process. Information relating to the project is gathered below: i. A new machine costing RM500,000 needs to
Digital Capture Enterprise is considering automating its printing process. Information relating to the project is gathered below: i. A new machine costing RM500,000 needs to be purchased. The expected salvage value at the end of its 5-year life is RM50,000. The machine will be depreciated using straight line method. ii. The automation process is expected to increase the sales of the company by RM250,000 ii. The printing cost will increase by RM150,000 per annum. iv. The automation process will result in decreased of labour cost of RM80,000 per annum. v. The annual maintenance will increase by RM80,000 per annum vi. The cost of defects will reduce by RM12,500 per annum. vii. The corporate tax rate is 25% and the cost of capital of the company is 12%. Below are given present value interest factor table: Period 6% 12% 20% 1 0.94340.8929 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: a. Calculate the payback period and the net present value of the project (show your workings on annual differential cash flows). (13 marks) b. Briefly explain whether the company should accept or reject the project. (2 marks)
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