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Question 1 Rhea Berhad plan to buy a new machine costs RM250,000, plus an additional RM30,000 in shipping and installation costs. Moreover, the new machine
Question 1 Rhea Berhad plan to buy a new machine costs RM250,000, plus an additional RM30,000 in shipping and installation costs. Moreover, the new machine has an expected disposable value of RM50,000 in 5 years and will depreciated to a zero-book value over the life of the project using straight line method. The old machine cost the company RM150,000 just four years ago. The old machine is being depreciated on a straight-line basis over its expected five-year useful life. Due to changes in fuel costs, the old machine may only be sold today for RM20,000 The appeal of the new machine is that it is completely automated. Labour cost is expected to reduce by RM60,000 annually. However, the production cost will increase to RM80,000 from RM60,000. Upon buying the machine, it requires inventories to increase by RM20,000 and accounts payable increase by RM10,000. The change in Net Operating Working Capital is expected to be fully recovered at year 5. Rhea Berhad faces a 24% marginal tax rate and uses a 10% discount rate to evaluate equipment purchases for the printing machine. Required: a) Calculate the initial cash outflow associated with buying the new machine? (4 Marks) machine? b) Calculate the net present value if the company decided to buy the new printing (5 Marks) c) Should Rhea Berhad buy the new machine? (1 Mark)
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