Q1. You are the Chief Financial Officer of Tamuda Berhad, a leading Malaysian property developer. Tamuda Berhad is considering the development of a wireless home networking appliance, called HomeNet that will provide both the hardware and the software necessary to run an entire home from any internet connection. In addition to connecting PCs and printers, HomeNet will control new internet-capable stereos, digital video recorders, heating and air-conditioning units, major appliances, telephone and security systems, office equipment, and so on. The major competitor for HomeNet is a product being developed by Damuda Berhad. Based on extensive marketing surveys, the sales forecast for HomeNet is 50,000 units per year. Given the pace of technological change, Tamuda Berhad expects the product will have a fouryear life and an expected wholesale price of RM260. Actual production will be outsourced at a cost (including packaging) of RM110 per unit. To verify the compatibility of new consumer internet-ready appliances, as they become available, with the HomeNet system, Tamuda Berhad must also establish a new lab for testing purposes. It will rent the lab space, but will need to purchase RM10.5 million of new equipment. The salvage value of this equipment after year 4 is RM1.8 million. The equipment will be depreciated using the straight-line method over a five-year life. Tamuda Berhads marginal tax rate is 40% and its weighted average cost of capital is 12%. The lab will be operational at the end of one year. At that time, HomeNet will be ready to ship. Tamuda Berhad expects to spend RM2.8 million per year on rental costs for the lab space, as well as marketing and support for this project. At setup, Tamuda Berhad requires RM500,000 in net working capital which will be recaptured at the end of the project. Required: (a) Generate the relevant cash flows needed to analyze the proposal. (24 marks)

(b) Compute the net present value (NPV) of the proposal. (3 marks) (c) Calculate the internal rate of return (IRR) of the proposal (3 marks) (d) Make a recommendation to accept or reject the proposal, and justify your answer. (6 marks) (e) Identify the highest cost of capital that the firm could have and still accept the proposal and defend your answer. (4 marks)