QUESTION 3 (CLO 4, 25 MARKS) Glassy Sdn. Bhd. specialises in the production of UPVC windows and doors. It is considering whether to invest in a new machine with a capital cost of RM4 million. The machine would have an expected life of five years, at the end of which it would be sold for RM450,000. The existing machine generates annual revenue of RM8 million and its running costs are RM840,000 per year. If the new machine is purchased, annual revenues are expected to increase by 20%. In addition to this, however, machine running costs are also expected to increase. Estimates have shown that, in the first year with the new machine, running costs will increase by 18%. In every subsequent year thereafter, running costs will continue to be 18% higher than each previous year's costs. If the new machine were to be purchased, the existing machine could be either sold immediately for RM250,000, or hired out to another company at a rental amount of RM100,000 per annum, payable yearly in advance, for three years. If the machine is hired out rather than sold, it will have no residual value at the end of the three-year period. The company's cost of capital is 10%. Required: a. b. Calculate, to the nearest RM000, the net present value of the proposed investment, over five years and state with reasons whether the machine should be purchased. (15 marks) Explain, with workings, whether the old machine should be sold off immediately or hired out. (10 marks)