Question $2$

Stupendo Sdn$.$ Bhd$.$ is currently in the midst of evaluating a new product that can help to improve the

company's overall corporate performance. The company expects the product to have a four$-$year life

cycle during which $10,000$ units will be sold in year one, increasing by $10\%$ annually throughout its

life cycle.

The company's expected selling price and variable production costs in year one is expected to be

RM$200$ and RM$120$ respectively. The selling price and variable production costs inflation is expected

to be $5\%$ and $4\%$ respectively.

A specialised machine with an estimated cost of RM$1$ million will be purchased for the production of

the new product and is expected to be sold at the end of year four for RM$200,000.$ Working capital of

RM$300,000$ is required and is expected to be recovered in full at the end of year four. Annual running

costs of RM$200,000$ will be incurred in year one and this is expected to increase by $2\%$ compounded

annually.

The company's profit is subjected to corporation tax of $24\%$ payable one year in arrears. The company

is allowed to claim capital allowance based on $25\%$ on a reducing balance basis. Any unclaimed

allowances will be treated as balancing allowance at the end of year four.

Stupendo Sdn$.$ Bhd$.$ has a real after$-$tax cost of capital of $5\mathrm{.}7\%.$ Based on a report published hy Bank

Negara recently, it is expected that the general inflation for the whole duration of the new product's

life$-$cycle will average at $5\%$ per annum.

Required:

$($a$)$ Calculate the money rate of return that can be used as the discount factor to evaluate the new

product for Stupendo Sdn$.$ Bhd$.$ using Fisher's equation.

$($b$)$ Calculate the net present value of the new product and comment on its financial viability.

Show your calculation to the nearest RM$1,000.$

$($c$)$ Calculate the sensitivity of the viability of the new product towards a change in the cost of the

specialised machine.