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Imperial Red Berhad is considering the purchase of a new production machine, which will cost RM220,000, plus an additional RM20,000 to ship and install.
Imperial Red Berhad is considering the purchase of a new production machine, which will cost RM220,000, plus an additional RM20,000 to ship and install. The new machine will have a 6- year useful life and will be depreciated to zero using the straight-line method. The machine is expected to generate new sales of RM80,000 per year and is expected to save RM15,000 per year in labour expenses over the next 6 years. However, the production costs will increase RM8,000 annually. Upon buying the machine, it requires inventories to increase by RM15,000 and accounts payable will increase by RM10,000. The change in Net Operating Working Capital is expected to be fully recovered at year 6. The machine is expected to have a disposal value of RM30,000 at the end of year 6. Imperial Red Berhad uses an 8% discount rate for capital budgeting purposes and the firm's income tax rate is 30%. Required: a) Calculate the project initial outlay. b) What is the NPV of the proposed project? (2 Marks) (7 Marks) c) Should Imperial Red Berhad proceed with the project? (1 Mark)
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