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Question 1 Salt Berhad is considering purchasing a new machine. The machine costs RM200,000 and requires installation costs of RM1,500 and modification cost of RM8,000.
Question 1 Salt Berhad is considering purchasing a new machine. The machine costs RM200,000 and requires installation costs of RM1,500 and modification cost of RM8,000. In addition, a shipping cost of RM2,000 will be charged to Salt Berhad to transport the machine. Over its five-year life, the machine is expected to generate new sales of RM40,000 per year and is expected to save RM9,000 per year in labour expenses over the next 5 years. However, the annual production costs will increase to RM6,000 a year. Upon buying the machine, it requires inventories to increase by RM10,000 and accounts payable increase by RM4,000. The change in Net Operating Working Capital is expected to be fully recovered at year 5. Training costs of employees who will operate the new machine will be a one-time cost of RM5,000 which should be included in the initial outlay. The new machine will be depreciated using straight line method over its useful life. The firm has a 12% cost of capital and a 25% tax on ordinary income and capital gains. Required: a) Calculate the project initial outlay. (2 Marks) b) Calculate the NPV of the proposed project. (7 Marks) c) Should Salt Berhad proceed with the project? (1 Mark) d) In the context of capital budgeting, explain why depreciation is included in the calculation? (2 Marks)
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