Question 1 ABC Beauty Products Corporation is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost RM375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of RM50,000 at the end of its life. The machinery will also need a RM35,000 overhaul at the end of year 6. A RM40,000 increase in working capital will be needed for this investment project immediately. The new shampoo is expected to generate net cash inflows of RM85,000 per year for each of the 10 years. ABC's discount rate is 16%. Required: What is the net present value of this investment opportunity? (10 marks) (b) Based on your answer to (a) above, should ABC go ahead with the new conditioning shampoo? Explain marks) Calculate and comment on the sensitivity of the investment decision to a change in the annual net cash inflows. (5 marks) (d) Discuss TWO (2) benefits to ABC of using sensitivity analysis in this investment assessment. (8 marks) [Total: 25 Marks] : | - % | 5 | , 6 Present Value Tables Interest Rate per Year 24 Interest Rate per Year 23 % ||m | 20 864 Discount factors: Present value of $1 to be received after years = 1/1 + 18 APPENDIX TABLE 1 Note: For comple, the interest rate is 10% per year, the present value of $1 received at year 5 i 5.621 A 18 17% | 16% 05 Number of Years 2. Number of Years - - T25 A-2 Present Value Tables APPENDIX TABLE 3 Annuity table: Present value of $1 per year for each of t years = 1/7-171711 + n]. Number of Years 14% 15% Interest Rate per Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 990 971 962 952 .943 935 .926 .917 .901 .893 .885 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 2.941 2.884 2829 2.775 2.723 2.673 2624 2.577 2.531 2.487 2.444 2.402 2.361 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 980 1 2 909 3 .877 1.647 2.322 2.914 3.433 .870 1.626 2.283 2.855 3.352 4 5 6 7 8 3.784 4.160 4487 4.772 5.019 9 10 5.796 5.601 5.417 5.242 5,076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.289 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5650 5.426 5.216 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.1945.918 5.660 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 13.00 12.11 11.30 10.56 9.899 9.296 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 6.142 11 12 13 14 15 5.234 5.421 5.583 5.724 5.847 16 17 18 19 20 14.72 13.58 12.56 11.65 10.84 15.56 14.29 13.17 12.17 11.27 16.40 14.99 13.75 1266 11.69 17.23 15.68 1432 13.13 12.09 18.05 16.35 14.88 13.59 12.46 10.11 10.48 10.83 11.16 11.47 9.447 9.763 10.06 10.34 10.59 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 9.122 8.544 8.022 7.5497.120 6.729 6.373 6.047 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 9.604 8.950 8.365 7.8397.366 6.938 6.550 6.198 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 Number of Years 1 Interest Rate per Year 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% .862 .855 .847 .840 833 826 820 813 806 .800 .794 .787 .781 .775 .769 1.605 1.585 1.566 1.547 1.528 1.509 1.492 1.474 1.457 1.440 1.424 1.407 1.392 1.376 1.361 2.246 2.210 2.174 2.140 2.106 2.074 2.042 2.011 1.981 1.962 1.923 1.896 1.868 1.842 1.816 2.798 2.743 2.690 2.639 2.589 2.540 2494 2.448 2.404 2.362 2.320 2.280 2241 2203 2.166 3.274 3.1993.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 2.635 2.583 2.532 24832436 2 3 4 5 6 7 8 9 10 3.685 3.589 3.498 3.410 3.326 3245 3.167 3.092 3.020 2.951 2.885 2.821 2.759 2.700 2.643 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 3.083 3.009 2.937 2.868 2.802 4.344 4.207 4.078 3.964 3.837 3.726 3.619 3.518 3.421 3.329 3.241 3.156 3.076 2.999 2925 4.607 4451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 3.366 3.273 3.184 3.100 3.019 4.833 4.659 4.494 4.3394.192 4.054 3.923 3.799 3.682 3.571 3.465 3.364 3.269 3.178 3.092 11 12 13 14 15 5.029 4.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656 3.543 3.437 3.335 3.239 3.147 5.197 4.988 4.793 4.611 4.439 4278 4.127 3.985 3.851 3.725 3.606 3.493 3.387 3.286 3.190 5.342 5.118 4.910 4.715 4.533 4.3624.203 4.053 3.912 3.780 3.656 3.538 3.427 3.322 3.223 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 3.695 3.573 3.459 3.351 3249 5.575 5.324 5.092 4.876 4,675 4.489 4.315 4.153 4.001 3.859 3.726 3.601 3.483 3.373 3.268 16 17 18 19 20 5.668 5.405 5.1624.908 4.730 4.536 4.357 4.189 4.033 3.887 3.751 3.623 3.503 3.390 3.283 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 3.771 3.640 3.518 3.403 3.295 5.818 5.534 5.273 5.033 4.812 4608 4.419 4243 4.080 3.928 3.786 3.654 3.529 3.413 3.304 5.877 5.584 5.316 5,070 4.843 4.635 4.442 4.263 4.097 3.942 3.799 3.664 3.539 3.421 3.311 5.929 5.628 5.353 5.101 4.870 4.657 4.460 4.279 4.110 3.954 3.808 3.673 3.546 3.427 3.316 Note: For example, if the interest rate is 10% per year, the investment of $1 received in each of the next 5 years is $3.791
