Question 1 (25 marks) D7-8 Sakura International Limited is considering to setup a new production line to produce their product -rice balls in an industry building for a 6-year contract. Harvey is the financial manager of the company, who has estimated that the total cost for purchasing rice cooking machines and packing machines is about $800,000; whereas the fitting out works (i.e. one-time installation works for the new production line) costs $7,200,000, monthly rent and electricity costs S(160,000 1000xD1, monthly operation and maintenance (including materials, labour expenses) costs $260,000. In addition, the expected monthly revenue would be S650,000 and the company can get S120,000 back at the end of contract. Given that the company's minimum acceptable rate of return (MARR) is 12% annually. (a) Draw a cash flow diagram to indicate all the cash flows of this new production line. Clearly (3 marks) label all the key values in the diagram. (b) Use future worth (FW) method to evaluate whether this proposed production line shall be (3 marks) constructed. Justify your answer with reason(s). Does the financial (4 marks) (c) Use annual worth (AW) method to repeat the calculation in part (b) above. manager need to change his decision accordingly? (d) Determine the internal rate of return (IRR) of the new production line. (5 marks) (Hints: You may want to try 2% and 3% monthly rates by using linear interpolation method) (e) Given that the annual re-investing interest rate is 18%, determine the external rate of return (5 marks) (ERR) of the new production line (f) Determine the simple payback period and the discounted payback period for the new production line. (N.B. The $120,000 getting back at the end of contract can simply be ignored (5 marks) in the calculation.) Question 1 (25 marks) D7-8 Sakura International Limited is considering to setup a new production line to produce their product -rice balls in an industry building for a 6-year contract. Harvey is the financial manager of the company, who has estimated that the total cost for purchasing rice cooking machines and packing machines is about $800,000; whereas the fitting out works (i.e. one-time installation works for the new production line) costs $7,200,000, monthly rent and electricity costs S(160,000 1000xD1, monthly operation and maintenance (including materials, labour expenses) costs $260,000. In addition, the expected monthly revenue would be S650,000 and the company can get S120,000 back at the end of contract. Given that the company's minimum acceptable rate of return (MARR) is 12% annually. (a) Draw a cash flow diagram to indicate all the cash flows of this new production line. Clearly (3 marks) label all the key values in the diagram. (b) Use future worth (FW) method to evaluate whether this proposed production line shall be (3 marks) constructed. Justify your answer with reason(s). Does the financial (4 marks) (c) Use annual worth (AW) method to repeat the calculation in part (b) above. manager need to change his decision accordingly? (d) Determine the internal rate of return (IRR) of the new production line. (5 marks) (Hints: You may want to try 2% and 3% monthly rates by using linear interpolation method) (e) Given that the annual re-investing interest rate is 18%, determine the external rate of return (5 marks) (ERR) of the new production line (f) Determine the simple payback period and the discounted payback period for the new production line. (N.B. The $120,000 getting back at the end of contract can simply be ignored (5 marks) in the calculation.)
