Question 2

Avroland is an amusement park. It currently uses a central computer system to perform general accounting functions, including the tracking of ticket sales and payroll, as well as employee and maintenance scheduling functions. The original system, when purchased two years ago, cost RM300,000 and has been depreciated for tax purposes using straight-line depreciation with an expected useful life of four more years and a zero salvage value. However, due to recent expansion, the computer system is no longer large enough. Upgrading the system to increase the storage capacity and processing speed to accommodate the extra data processing

demands would cost RM65,000. They system would become obsolete in four years.

These system additions would also be depreciated using straight-line depreciation and would have a zero salvage value. The company's accountant estimates that the firm will increase operating spending by RM28,000 per year after taxes for data processing, payroll (including Avroland personnel), and annual updates of software for the upgraded system. Alternatively, the firm could outsource payroll to a local payroll-processing firm at the cost of RM40,000 a year after taxes. This outsourcing would free up enough computer capacity to prevent having to upgrade the system.

Assume a real cost of capital of 4 percent and a tax rate of 40 percent.

Required:

Should Avroland keep payroll inside or outsource payroll? Show all your calculations.

Question 3

H Bhd is planning to open a restaurant near a new housing development and office park. H estimates that the neighborhood's fast food market will be RM800,000 per year when the new housing and offices are occupied next year. H expects to capture 25% of the total neighborhood market unless McDota also opens a new store in the area. In that case, H Bhd expects to gain only 15% of the market. H's gross margin ratio is 40%.H Bhd intends to extend its operations through year 5 by spending an additional RM30,000 at the end of year 4, which is deductible from income tax in year 5. They have prepared the following estimates that they believe are valid for the first 4 years of the investment:

First year's market

RM800,000

Annual market growth

10%

Market share without McDota

25%

Market share with McDota

15%

Gross margin ratio

40%

Opportunity (discount) rate

8%

Investment cost

RM(100,000)

Tax rate

35%

Depreciation

25,000

SG&A

10,000

Assume that H Bhd makes its investment decision now without resolving the uncertainty about McDota's intentions.

Required:

a)Find the NPV of the project without the competitor McDota.

b)Find the NPV of the project if McDota enters the market.