Question 1

WC Sdn Bhd is considering to buy a giant machine which is expected to increase its factory production output and profits over an expected useful life of 5 years. The initial cost of investment of this machine is RM3,500,000. The estimated annual profits for the next 5 years, are as follows

RM

Year 1 200,000

Year 2 400,000

Year 3 700,000

Year 4 550,000

Year 5 300,000

It is expected that machine will depreciate its useful lives and the Company is adopting straight-line method in depreciation this machine.

It is noted that the annual profits above are derived after deducting:

(i) annual depreciation, with an assumption that the residual value for the machine at the end of Year 5 shall be RM50,000.

(ii) annual administrative expenses of RM35,000.

(iii) annual general provision for various expected write-offs. This provision was computed based on 1% of the investment value.

Further information:

Cost of capital of the company is 15% per annum. The following are the present value information:

Present value

10% 15% 20%

Year 1 0.909 0.870 0.833

Year 2 0.826 0.756 0.694

Year 3 0.751 0.658 0.579

Year 4 0.683 0.572 0.482

Year 5 0.621 0.497 0.402

Required:

a)Calculate the payback period, net present value, internal rate of return and accounting rate of return of the planned investment project.