Management Accounting

Ahmad Pertanian Bhd is considering investing in a new agriculture machine costing RM200,000. Its life is expected to be four years and it will have no scrap value at the end of this period. The following details are given relating to the machinerys activities:

1. Unit selling price is RM60.00 and unit variable costs of production are:

	RM
Direct materials	8.00
Direct labour	5.00
Variable overheads	7.00

2. Sales volume relating to production from the machinery is expected to be:

Year	Sales Volume (units)
1	2,100
2	2,200
3	2,500
4	2,600

3. Fixed costs amount to RM16,000 per annum. One quarter of the fixed costs is cash flow related items.

4. The company anticipates a cost of capital to be 10%.

REQUIRED:

1. Explain the Net Present Value relating to investment of funds in long term investments.

2. Determine cash flows in Years 1- 4.

3. Calculate the Net Present Value for the project.

4. Comment on the viability of the project.

5. Calculate the net present value at the discount factor of 30% and Internal Rate of Return (IRR) for the project.

6. Based on your answer in (c) above, should the project be accepted? Explain your decision.

g. IRR technique cannot be used by Sino Malay Bhd to assess potential investment projects. Discuss the above statement.