QUESTION 3 1-Determine the accounting net profit and projected cash flows loss for the espresso coffee maker project each year until the year 4 (you can use the data and format in Exhibit 2). Your answers shall include: i- Calculation of total sales and total cost for each year until the year 4,

ii-Extract statement of profit or loss for the project each year until the year 4, and

iii- Extract statement of cash flow at operating activities for the project each year until the year 4.

2-Applying the company policy that the expected return on additional investment to the premise shall be 200%, evaluate the decision to be taken for the project using; i- Net Present Value (NPV)

ii- Internal Rate of Return (IRR) the NPV, and

iii- Discounted payback period.

vi- Should the project be acceptable? Justify your answer.

ANALYSIS OF THE PROFITABILITY VS CASHFLOW OF THE PROJECT Abdullah was delighted when he received Muhammad's calculation results and the WACC estimate. He thought that he had made a good decision in hiring Muhammad. For further analysis, Abdullah and Muhammad had the following conversation regarding how they should evaluate the potential profitability of the project. Muhammad: With the sales and cost estimates, I have obtained from the marketing and accounting departments in Exhibit 2, we should be able to estimate the project's cash flows for the four-year horizon. Abdullah: Excellent! Since we are in the beverage business, all our sales are in cash, and we settle all the expenses in the month incurred. How are we going to evaluate the project's profitability to determine if it is feasible? Muhammad: The Net Present Value (NPV) and Internal Rate of Return (IRR) methods are generally used to evaluate project. The financial goal of a firm is to maximize market value. The NPV of a project shows its contribution to the market value of the firm. Abdullah: Correct! However, the NPV is a dollar amount. It is difficult to explain the profitability of a project as a dollar amount to the company's shareholders. It is easier to compare the project's IRR with the firm's WACC to convince the shareholders that we can earn a higher percentage return on the investment than what it would cost to finance it. Muhammad: Currently, our company's WACC is around 10%. It is inappropriate to use the WACC as the rate of return for a stand-alone project like this. It needs to have its owed required rate of return to cover the allocated cost imposed later on. Page 5 of 8 ACFM613, Semester 1, 2021/2022 Abdullah: Wow! Great understanding. Since our coffee shop is the place for people to hang out, we need a higher return for every investment we make as it also needs to cover the customers' time spent. Our policy is that any additional investment to the existing premise shall have a 200% return. I would also like to see the NPV, IRR, and discounted payback period results for the project. Muhammad: Consider it done! With the instructions he received from Abdullah, Muhammad immediately started to work on the cash flow calculations using the data in Exhibit 2 to analyze the project's profitability with the NPV, IRR and discounted payback period methods. Exhibit 2: The data Muhammad plans to use in the calculation of the cash flows for the project and in the evaluation of its profitability The Machinery's Invoice Price Shipping Charges Installation Cost Depreciable Basis RM 56,000 1,000 3,000 60,000 Depreciation Rates: Straight-line method at 25% per year Salvage Value: RM8,000 Annual revenue and cost estimates (assume 3% inflation rate): Year 1 Year 2 Year 3 Units 30,000 30,000 30,000 Unit Price (RM) 12.50 Unit Cost 6.50 Year 4 30,000 Sales Costs RM 375,000 225,000 This exhibit shows the data needed to calculate the cash flows for this project. The new production system has a useful life of 4 years, with a salvage value of RM8,000. The expresso coffee maker is expected to generate 30,000 cups of sales per year, with a unit selling price of RM12.50 and a unit cost of RM6.50