QUESTION 4 (25 Marks) A. Gimmik Bhd is considering purchasing a machine that would cost RM403,200 and has useful life of 9 years. The machine would reduce cash operating costs by RM74,667 per year. Th taxation in this problem e machine would have a salvage value of RM60,480 at the end of the project. Ignore Required: Compute the payback period of the machine a) iver (2 marks) b) Compute the simple rate of return of the machine Annual nen cash ja(6 marks) c) Discuss TWO (2) reasons why depreciation is not deducted in computing the present value ofa project hot the current ash tin. (4 marks) B. Dr Ramlan Mahmood will retire in six years. He wants to open some type of small business operation that can be managed in the free time he has available from his regular occupation, but that can be closed easily when he retires. He is considering several investment alternatives, one of which is to open a laundromat. After careful study, Dr Ramlan has determined the following: 1. Washers, dryers and other equipment needed to open laundromat would cost RM194,000. In addition, RM6,000 in working capital would be required to purchase an inventory of soap, bleaches, and related items and to provide change for change machines. (The soap, bleaches, and related items would be sold to customers at cost). After six years, the working capital would be released for investment elsewhere. 2. The luandromat would charge RM1.50 use for washers and RM0.75 per use for the dryers. Dr Ramlan expects the laundromat to gross RM1,800 each week from the washers and RM1,125 each week from the dryers. 3. The only available costs in the laundromat would be 7.5 sen per use for water and electricity for washers and 9 sen per use for gas and electricity for the dryer 4. Fixed costs would be RM3,000 per month for rent, RM1,500 per month for cleaning, and RM1,875 per month for maintenance, insurance, and other items. 5. The equipment would have a 10% disposal value in six years. Dr Ramlan will not open the laundromat unless it provides at least 12% return. Income tax is ignored in the operation of this business. Required: a) Compute the expected annual net cash receipt from the operations of Dr Ramlan's business. Assume the laudromat is opened 52 weeks per year (3 marks) (10 marks) Compute the net present value of the business b) **END OF QUESTIONS ** Page 5 of 5 BBF205/June 2014