KUALA LUMPUR: HIL Industries Bhd has expanded its face masks product range to include surgical-grade masks with anti-viral and filtration efficiency to remove over 99.9% of virus and air-borne particles.

In a statement, HIL said its healthcare arm, HIL Medic Sdn Bhd recently began the manufacturing of the four-layer, self-sanitising copper oxide Korean Filter 99 (KF99) at its manufacturing facility in Shah Alam.

HIL Industries president and chief executive officer Datuk Milton Ng said the addition to the companys face mask product line-up is timely, considering rising demand for higher-quality face masks.

Covid-19 is not quite behind us, rather we are living alongside the pandemic where the usage of face masks is fast becoming the norm and a necessity, as seen in the localities of respiratory virus outbreaks in recent past.

As economic and social activities resume globally on the back of mass-vaccination, demand for higher quality face masks remains solid as another line of defence against the emergence of new variants of the Covid-19 virus including Delta, Delta plus and Omicron, he added.

Based on the above news reported by TheStar dated 2 December 2021, the HIL Industries president and chief executive officer Datuk Milton Ng has also been considering adding the five-layer KN95 masks in its current product line-up. Assuming you are the corporate finance manager of HIL Industries Bhd. You are given a task to lead a team of finance analysts to evaluate whether or not HIL Industries Bhd should add this new product line in their manufacturing facility at Shah Alam. HIL Industries Bhd is an all-equity firm and the company tends to retain all earnings for future development.

You and your team have forecasted that to produce the five-layer KN95 masks, the company needs to purchase additional equipment, which will cost around RM350,000 and installation cost will be RM50,000. The equipment will be depreciated based on MACRS 5-year class with depreciation rates of 20% for the first year, 32% for the second year, 19.20% for the third year, 11.52% for the fourth year and 11.52% for the fifth year. The equipment is expected to sell at RM30,800 after five years of use.

Based on current market growth, your team experts the new product line to sell around 200,000 units per year. The average unit price and unit cost per unit is around RM2.80 and RM1.20 in year 1, respectively. The unit price and unit cost are expected to rise by 2 percent in the subsequent two years based on the current market situation, inflation has been an agenda since the past few months. The team expects the inflation will go back to zero percent after two years. The new product line will require RM48,000 in net working capital to start and subsequently, the net working capital will be equal to 10% of sales revenues at the end of each year. The firms corporate tax rate is 30%.

You present this information to the management team after two days. Datuk Milton Ng reviews the proposal and suggests that a full capital budgeting analysis (i.e., NPV, IRR, Discounted Payback Period and Profitability Index) will be preferred for final decision-making, especially the risk of inflation that might reduce consumers purchasing power. The management set a discount rate of 10 percent and payback period of 3 years, which is appropriate for a firm of HIL Industries Bhd's risk.

Based on the full capital budgeting analysis, please provide a detailed recommendation to the management team. (40 marks)