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QUESTION 1 TNX Berhad is considering the purchase of a new production stamping machine under its expansion programme. It costs RM1,000,000 and requires installation costs
QUESTION 1 TNX Berhad is considering the purchase of a new production stamping machine under its expansion programme. It costs RM1,000,000 and requires installation costs of RM100,000. The old stamping machine has zero terminal book value and five years of useful life remaining. It is being depreciated using the straight-line method. It was purchased five years ago for RM500,000, and can be sold today for RM200,000. With the use of the new machine, sales in each of the next five years are expected to increase by RM500,000, and expenses (excluding depreciation) will represent 50% of sales. This new machine will not affect the company's net working capital requirements. The new machine is estimated to have a useful life of five years with RM100,000 salvage value and will be depreciated using the straight-line method. The company is subject to a 28% tax rate and its cost of capital is 10%. The desired payback period is five years. Required:- a. Determine the initial outlay and annual differential cash flows attributable to the new stamping machine. (15 marks) Compute the following for the new machine:- b. i. Payback period (1.5 marks) ii. Net present value (3 marks) iii. Internal rate of return (6.5 marks) C. Make a recommendation to accept or reject the new stamping machine. Justify your answer. (4 marks)
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