How to solve

QUESTION $2$

Mellany Pharmacy Bhd needs to buy a new processing machine costing RM$1,350,000,$ plus

RM$65,600$ for modification expense and RM$52,440$ for carriage inwards and installation. The

company is also required to increase its raw materials level by RM$69,000$ and trade creditors

is expected to be increased by RM$30,000.$

The new processing machine is expected to have a useful life of nine years, with a scrap value

of RM$120,000.$ The company needs to send $5$ workers for training at a cost of RM$25,000.$ The

company uses the straight$-$line method in depreciating its non$-$current assets.

The company is subject to $27\%$ corporate tax rate and its cost of capital is $9\%.$

In addition, Mellany Pharmacy Bhd has spent a total of RM$150,000$ in their R&D for their new

healthcare product. The company also spent another RM$45,000$ on a market survey carried

out last year to study the market response and demand towards their upcoming product.

Based on the R&D and market survey done, the company expects to generate sales revenue

of RM$680,000$ in the first five years and of RM$840,000$ in each of the remaining years. The

machine is expected to have a production cost of RM$374,000$ for each of the first five years

and of RM$462,000$ per year after that. In order to buy the new processing machine, the

company would have to borrow RM$450,000$ at $6\mathrm{.}5\%$ interest per annum and a total of

RM$32,500$ a year will be paid for this purpose. The balance will be financed by retained

earnings.

Required:

a$.$ Compute the:

i$.$ Initial outlay.

ii$.$ Annual cash flows.

iii. Terminal cash flows.

iv$.$ Internal rate of return.

b$.$ Advise Mellany Pharmacy Bhd whether they should purchase the new processing

machine or not. Explain.