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CAPITAL BUDGETING 1 Full House Sdn Bhd is a medium size company which involves in producing of plastics for plastic industry. Full House Sdn Bhd is planning to expand its production by replacing its old machine. A new machine can help to improve the productivity. The old machine was purchased 5 years ago and had been depreciated on a straight line basis. It has been fully utilized. Its current residual value is RM500 and can be sold for RM1,500. The purchase price of the new machine is RM120,000 with an expected useful life of four years. It is expected to have a residual value of RM8.000 at the end of its useful life. The following additional information relates to the new machine: 1. The production and sales in the first operating year is expected to be 8,000 units and the selling price is set at RM12 per unit. 2. It is estimated that the units produced and sold will increase by 10% each year starting in year 3. The company will sell the product at a price of 5% higher than the original price from year 2 onwards. 3. The operating costs are estimated at RM4 per unit for year 1. The cost is expected to increase by RM2 each year until year 3, then it will be remained the same throughout the project's life. 4. The machine is eligible for an initial allowance of 20% and an annual allowance of 15% on initial capital costs. 5. Tax rate is 28% and is payable at the end of each operating year. 6. The company's cost of capital is 15%. Required: a) Calculate the initial outlay for the new machine. b) Calculate the net present value (NPV) of the new machine and advise Fast and Furious Sdn Bhd on the purchase of the new machine. c) Further analysis of the NPV shows that, the new machine will get a negative NPV of RM10,000 if the cost of capital increase to 25%. Based on the information, calculate the internal rate of return (IRR) of the new machine. Explain how the use of discounted cash flow techniques is more realistic in long term capital budgeting. d)