MINI CASE STUDY

Bivient Company Corporation (BCC) is a medium electronics manufacturer located in KKIP, Sepanggar Kota Kinabalu Sabah. The company was founded 30 years ago with the original operation was repairing video player and other household appliances.

Over the years, the company expanded into manufacturing and is now reputable manufacturer of various electronics items. Competition from other company makes this company needs to maintain the quality of their production. Because of that, they need to ensure the machine that they used in their operation must be sophisticated and not out-dated.

Currently, this company is considering replacing an existing machine used in production that was purchased 5 years ago for RM125, 000 with a new computer system that could improve the company's operations. The old machine is being depreciated under straight line method over its useful life of 10 years with no salvage value. Its current market value is RM5, 000.

Chief Financial Officer for this company, Mr Abraham Teo has reviewing two (2) options: Machine TKC imported from China and Machine RMR imported from Japan. Below is the information provided for the new machine.

Machine TKC Machine RMR Cost of Asset RM200,000 RM150,000 Freight and transportation cost RM10,000 RM12,000 Installation cost RM5,000 RM3,000 Renovation cost (before installation of the machine) RM8,000 RM5,000 Training cost (to operate the machine) NA RM5,000 Depreciation method Straight line Straight line Salvage value RM10,000 RM8,000 Useful life 5 years 5 years

2

The replacement of old machine will result the following changes:

Old machine Machine TKC Machine RMR Annual sales RM500,000 Increase by 20% Increase by 35% Annual cost of defects RM80,000 Decrease by 5% Decrease by 3% Annual operating cost RM50,000 Increase by 2.5% Increase by 4% Quarterly maintenance cost RM10,000 Decrease by 1.5% Increase by 2% Initial investment in Net working capital NA RM30,000 RM20,000

Assume that the company's cost of capital and tax rate is 10% and 40% respectively. From the replacement plan, calculate: i) Payback periodii) Profitability indexiii) Internal rate of return (IRR)iv) Net Present Value (NPV)v)Based on your answers in (i) through (iv), which machine will you finally choose? Why?