Metal Style Sdn. Bhd. (MSSB) manufactures and sells stainless steel beds. MSSB is now planning to introduce a new product in the market, which is called "SleepKings". As a result the company requires an investment of RM350,000 in a new laser tube cutting machine. If this machine is purchased, it is estimated that the company would incur an annual maintenance cost for RM25,000. This machine would have a useful life of three years and could be sold for cash of RM50,000 at the end of year 3. It will be depreciated over three years using the straight-line method. The company can claim a 20% initial allowance and 14% annual allowance on this machine. The sales and production of the SleepKings over its life cycle (Year I to Year 3) are projected to be 9,000 units, 8,500 units, and 11,000 units respectively. It is assumed that all units produced are sold. The selling price and the variable production cost per unit in Year I will be RM2,000 per unit and RM1,400 respectively and both are expected to increase at a rate of 10% per annum for the remainder of the project's life. The total fixed costs in Year I will be RM2 million including depreciation and the amount remains constant for the foreseeable future. MSSB pays a tax of 24% one year in arrears. The company's cost of capital is estimated to be 15% per year. It is assumed that the initial capital investment will be incurred at the beginning of the first year. Required: (a) Compute the yearly capital allowance for the machine AND tax payable for the duration of the project. (Round up your answer to two decimal points). [16 marks) (6) Evaluate the project using the net present value (NPV) technique. (Round up your answer to two decimal points). [6 marks) (c) Recommend whether the project is worthwhile based on your calculations in (b). Provide justification for your answer. [3 marks) Metal Style Sdn. Bhd. (MSSB) manufactures and sells stainless steel beds. MSSB is now planning to introduce a new product in the market, which is called "SleepKings". As a result the company requires an investment of RM350,000 in a new laser tube cutting machine. If this machine is purchased, it is estimated that the company would incur an annual maintenance cost for RM25,000. This machine would have a useful life of three years and could be sold for cash of RM50,000 at the end of year 3. It will be depreciated over three years using the straight-line method. The company can claim a 20% initial allowance and 14% annual allowance on this machine. The sales and production of the SleepKings over its life cycle (Year I to Year 3) are projected to be 9,000 units, 8,500 units, and 11,000 units respectively. It is assumed that all units produced are sold. The selling price and the variable production cost per unit in Year I will be RM2,000 per unit and RM1,400 respectively and both are expected to increase at a rate of 10% per annum for the remainder of the project's life. The total fixed costs in Year I will be RM2 million including depreciation and the amount remains constant for the foreseeable future. MSSB pays a tax of 24% one year in arrears. The company's cost of capital is estimated to be 15% per year. It is assumed that the initial capital investment will be incurred at the beginning of the first year. Required: (a) Compute the yearly capital allowance for the machine AND tax payable for the duration of the project. (Round up your answer to two decimal points). [16 marks) (6) Evaluate the project using the net present value (NPV) technique. (Round up your answer to two decimal points). [6 marks) (c) Recommend whether the project is worthwhile based on your calculations in (b). Provide justification for your answer. [3 marks)
