QUESTION $4(25$ MARKS$)$

In the age of Artificial Intelligence $($AI$),$ all companies are pursuing technological innovation

to stay competitive. Hence, NuRobotic Sdn$.$ Bhd$.$ is considering investing in a new AI

application which would cost RM$2\mathrm{.}05$ million to acquire and install. Meanwhile, some

equipment that supports the old system can be scrapped upfront and generate net

proceeds of RM$50,000.$

However, the AI application requires a minimum trial run period of one year. During

the first year of the trial run, the company needs to spend an implementation fee of

RM$750,000.$ Operating profit to be derived from the new AI application is forecast to

be RM$0\mathrm{.}5$ million at the end of second year, RM$1$ million at the end of third year, RM$1\mathrm{.}5$

million in the fourth year, RM$1\mathrm{.}8$ million in the fifth year of operation and RM$2$ million

in the sixth year of operation. The life span of the AI application is expected to be six

years and the company$$s target is to generate profit not later than fourth year. The

new AI application has an estimated residual value of RM$100,000$ and will be

depreciated on straight line basis. As the company is granted a special tax$-$free status

by the government, it cannot claim any capital allowances on the cost of the capital

investments. The company$$s nominal cost of capital is $10\%.$

a$)$ Assess the project$$s viability by computing its:

i$)$ Net Present Value

$(10$ marks$)$

ii$)$ Internal Rate of Return

$(5$ marks$)$

iii$)$ Discounted Payback Period

$(3$ marks$)$

iv$)$ Accounting rate of return

$(3$ marks$)$

b$)$ Advise the management on whether it should go ahead to replace its current

system with AI application