QUESTION 1

Black Forest Products Berhad is considering two mutually exclusive investments. The projects expected net cash flows are as follows:

YEAR	EXPECTED NET CASH FLOWS
	PROJECT X (RM)	PROJECT Y (RM)
0	(17,000)	(17,000)
1	8,000	2,000
2	7,000	5,000
3	5,000	9,000
4	3,000	9,500

If the required rate of return is 12%,

1. Calculate the discounted payback period. Which project will you choose?
2. Calculate the IRR for project Y. Should you accept this project if it is an independent project?

Question 2

Bangun Berhad is considering a new assembly line costing RM6,000,000. The assembly line will be fully depreciated by the simplified straight-line method over its 5 year depreciable life. Operating costs of the new machine are expected to be RM1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of RM3,000,000. If sold today the company would receive RM2,400,000 for the existing machine. Annual operating costs on the existing machine are RM2,100,000 per year. Bangun Berhad is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent. Should Bangun Berhad replace the existing machine with new one? Calculate the net present value of replacing the existing machine.

Question 3

Mr. Kaer, a finance executive with Zico Bhd. was instructed by CEO to revise the draft the tender bid for a contract of supplying canvas to the Military Department of Malaysia. The contract include the supply of 100,000 meters of canvas material every year for 5 years. The price of the tender for one meter is RM30. If the company is successful in getting the tender, a new machine will be required and the cost is RM 1 million. The new machine will have a useful life of 5 years, with an estimated residual value of RM250,000. Depreciation allowance is on a straight-line basis. The company need to renovate the factory for the processing of the canvas and the cost is RM500,000. Mr Kaer receives another additional information regarding a company which operates a chain of hotel has offered RM600,000 to purchase the land as well as the old factory. Zico Bhd. will bear fixed cost in operation and sales at RM300,000 a year and variable cost of RM18 for every meter canvas produced. The initial working capital is RM300,000 and the need working capital will not change. The tax rate is expected to be low i.e 25% and the rate of return that is required is 12%.

a. Calculate the initial investment of the project.

b. Determine the after-tax annual cash flow (year 1 until year 4) project.

c. Calculate the after tax cash flow in year 5.