Fitness and Wellness Sdn. Bhd. produces a range of exercise and fitness equipment. The company is considering acquiring one of two businesses in order to diversify its operations. The options are as follows: Option 1: Gym Accessories Estimated cost of acquisition RM8,000,000.00 Annual production 400,000 units Sales 75% of production is to be sold under an existing fixed price contract which has a further four years to run at RM20.00 per unit. The remaining 25% will be sold at the following prices: Year 2 3 4 Selling 18.0 18.50 20.00 |21.00 price/unit (RM) 0 Operating costs (including depreciation) are estimated at RM4 million in each of years 1 and 2 and RM4.4 million in each years 3 and 4. Depreciation is estimated at RM500,000.00 per annum. Option 2: Muay-Thal Accessories Estimated cost of acquisition RM6,800,000.00 Annual production 250,000 units Sales A contract already exists covering the next four years under which the entire product will be sold at a price of RM16.00 per unit for years 1 and 2, and RM19.00 per unit in years 3 and 4: Operating costs (including depreciation) are estimated at RM900,000.00 in year 1, RM1,000,000.00 in year 2 and RM1.200,000.00 in each years 3 and 4. Depreciation is estimated at RM300,000.00 per annum. Whichever option is chosen, the estimated cost of acquisition would be payable immediately. All other receipts and payments take place at the end of each year. The cost of capital for Fitness and Wellness Sdn. Bhd. is 10%. Required: a. Determine the net present value of each of the two options. b. Evaluate each option and recommend which, If either, Fitness and Wellness Son. Bhd. should choose